It’s July; It’s Supposed to be Hot
The July weather isn’t the only thing that is heating up. “The nation’s gross domestic product expanded at a nearly 4% rate in the second quarter, according to estimates.” As a result of this increase, Kiplinger’s recently predicted that the Federal Reserve will hike interest rates twice more this year, in September and December.”
For the past 8 years, with the artificially low Federal Interest rates, businesses have been using their cash reserves to acquire equipment. However, if the rates do increase, many companies will now be advised to finance any depreciable asset acquisition with a lease.
As stated in our website, cash purchases not only deplete cash reserves that a business may need for operations; it can have a negative impact on the balance sheet. Additionally, businesses will finally be earning a decent rate of return on their cash accounts.
Tom Toton of Corcentric (formerly, AmeriQuest Business Services), reinforces this strategy in The Monitor, a leading leasing industry magazine. In his article, “Invest in Your Company, Not Depreciable Assets”, he cites his explanations.
- Your company will become “asset light” which increases the business valuation.
- A lease finances 100% of the asset as opposed to a bank loan.
- You could have a higher rate of return on your cash if you invest it in assets that grow your business, rather than depreciable equipment.
Mr. Toton provides examples to expand and illustrate these assertions. Since his expertise is in financing transportation equipment, he uses a trucking company’s situation.
“If the company has $10 million in earnings and their multiple is five, they are actually worth $50 million. If a company worth $50 million went with operating leases, it would be perceived as more asset light and their multiple might be eight. They still have the same overall expenses, but they move the depreciable asset of fixed assets, as well as eliminate the residual risk of resale at the end of the optimal economic equipment life. So, the value went up $30 million and the company has not changed anything other than giving ownership of the asset to the leasing company.”
In the case of a bank loan that requires a 20% deposit, a company will have that amount of their own equity tied up in a depreciable asset. It is better to use the leasing company’s money, he declares, since “The weighted cost of capital is lower when using someone else’s money rather than your own.”.
Finally, he calculates, “If your own money costs 10% and you get a higher rate of return for having that money in your business, you should invest in the things that make your business grow.” Examples are software, additional sales personnel, and expansion of product lines.
Try to stay cool as the temps increase and contact us if we can provide a lease quote for you or your customer.
It’s the lease we can do,
Kevin F. Clune, CLFP
Clune & Company LLC
