Could you purchase a $1 Billion Icebreaker?  

 

 Kevin F. Clune, CLP

 

Why should the U.S. Government purchase an icebreaker for $1Billion when they could lease it?  That question was posed in a recent Wall Street Journal article titled “A quick fix for the U.S. Icebreaker gap”. 

While most of us, including myself, are not intimately associated with the Icebreaker Leasing Industry, this discussion illustrates the basic concepts underlying the advantages of a lease finance arrangement over a cash purchase.

  1. Quick – The first word in the title of the article is “quick”, citing it as a key advantage. Obviously, coming up with $1B cash is tough even for government but approval for a lease arrangement would move “more quickly than the traditional acquisition process”. The same may also be true for private business.
  2. Easy Budgeting – Rather than a large outlay of cash to acquire equipment, a much lower fixed monthly payment over the term of the lease contract can more easily be included in the budget. An added benefit is that it is paid from income that is expected to be received in the future.
  3. Preservation of Credit Lines – A lease finance option will not only maintain a bank line of credit for cash flow purposes, it will also enable companies to have a more favorable balance sheet. Unfortunately, the U.S. Government doesn't seem concerned about showing a deficit, but private businesses are a different story.
  4.  Minimizes Risk – Since the leasing customer does not technically “own” the equipment with some lease contracts, they can avoid the risk of obsolescence and also can more easily finance equipment maintenance and even operations in the contract. For example, as cited in the article, Omega Air Refueling Services operates three planes that serve the U.S. Navy and Marine Corps and will most likely upgrade equipment as necessary.
  5. Tax Advantages – A lease allows for accelerated depreciation and with newly enacted Section 179 legislation, the limit has been raised to $500,000. These advantages should be reviewed and confirmed by your tax advisor.


In discussions with many of the Equipment Vendors who have used our services, we keep hearing that most of their customers are opting to pay cash or use their bank lines for their equipment acquisitions.

This article was a reminder of the reality that a lease option may be preferable in some circumstances.

The equipment lease & finance industry exists because there are benefits to lease financing. This information may help you to better weigh your options, whether you are a vendor or a prospective leasing customer.

We welcome the opportunity to serve you,

Kevin F. Clune, CLFP
Clune & Company