Lease Financing: A Way To Conserve Cash
By Alane Bendtsen, Feedlogic Corp.
With the current challenges in pig production, cash flow is on the top of everyone’s minds. Input costs are soaring while revenue is down. This scenario makes your banker nervous and tends to put a damper on any plans you may have had for capital expenditures such as building new barns or renovating old ones.
This is particularly frustrating if you have already done the work and spent some money to get permits and lock in quotes for materials and equipment. But before you give up on a capital project, you might consider lease financing as an option.
Here are some of the key benefits that leasing offers:
1. It allows you to acquire assets with minimal up-front costs.
- 100% of the project can be financed including site prep, concrete, labor, etc.
- Once the project is completed, there’s typically one monthly lease payment for buildings and two monthly lease payments for equipment.
- You can provide additional security in forms other than cash, allowing no interruption of business cash flow.
2. It offers off-balance-sheet financing which could help with your
ability to use operating lines.
- Many leases are treated as a contingent liability so they don’t typically affect key financial ratios, keeping your credit lines open.
3. Lease payments can usually be customized to fit your business
cash flow.
- Seasonal, flex monthly, skip, step down, step up are all different options of lease payment plans.
- Or you can have lease payments fixed for the entire term of the lease.
4. If you study the tax consequences of different lease types (with
help of your tax advisor), you can find one that best fits your
business.
- A true tax lease may allow you to deduct 100% of all lease payments as a rental expense for income tax purposes. At the end of a true tax lease the borrower chooses from three options: Purchase the asset, renew the asset or return the asset.
- A non-tax lease allows you to enjoy the cash flow benefits of leasing and maximize your depreciation benefits or utilize your Section 179 deduction.
5. Estate planning consequences.
- A lease can provide a means of finance which also allows clean transfer of assets to the next generation. This would be a key consideration if you are planning to retire soon and/or pass operations on to your children.
Alane Bendtsen is Regional Sales Manager for Feedlogic Corp. She has over 20 years of experience in the swine industry in areas including feed sales, financing, and production. Contact (507) 438-0320 or abendtsen@feedlogic.com
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