Equipment leasing makes sense for supermarkets

If there's one thing most successful businesses know about obtaining equipment, it's this: Use, not ownership, is what counts--and leasing, rather than paying cash or getting a bank loan, is the most desirable method of financing the purchase, whether the equipment is new or used. That's probably why 80 percent of U.S. companies currently lease some or all of their equipment.

There are many benefits to leasing, but the biggest relate to cash flow. First, with leasing, rental payments are closely matched to the revenue produced from using the equipment. Second, leasing keeps debt lines open for working capital rather than tying them up with capital expenditures. And third, leases feature important benefits not to be found in most bank loans: They offer fixed interest rates, terms of 24 to 84 months, and often, they finance 100 percent of the equipment's cost, even including installation and delivery. Lease structures also allow for greater flexibility than other financing options--seasonal payments, deferred payments and skip payments are not uncommon--and the turnaround time for approval is quicker, and documentation simpler. Leases also do not contain restrictive financial covenants typically associated with bank loans.

"Leasing helps me manage my cash flow," says Jerry Romanoff, president of Nebraska Meat Corp. "The flexibility of structuring lease payments to match seasonal changes in revenue makes leasing the right choice for me." Mark Cocchiola, president of Suprema Specialties, Inc., adds: "It enables us to preserve our credit lines while financing equipment for our expansions."

There are two ways to account for a lease. The first involves a capital lease. A capital lease usually has a $1 purchase option and the lessee (that is, the company leasing the equipment) depreciates the equipment as an asset on its balance sheet. The lessee can only expense the interest portion of the monthly payment Conversely, an operating lease affords special tax treatment. An operating lease allows the lessee to fully expense the monthly payment, avoid depreciating the asset and keep it off the balance sheet. Operating leases also have fair-market-value purchase options: At the end of the lease, the lessee typically has the option to either return the equipment or purchase it for what it's currently worth. Operating leases are considered to be tax-oriented leases because they are structured to save minimum tax liability. An additional benefit to a tax-oriented lease is a lower lease payment for the lessee. Since lessors are utilizing the depreciation instead of the lessee, they often compensate the les see with a lower monthly payment.

Leasing features a simple approval process. Lessors look at tangible net worth, profit and cash flow, which is important because there must be sufficient cash flow to service the additional debt of the new lease obligation. Consideration also must be given to any savings that the new equipment will bring to the bottom line. For example, does the new equipment that is being leased for $3,000 per month ($36,000 per year) replace an employee earning $50,000 per year?

These savings will affect the amount of money available to retire debt, as well, and once the lease is paid in full and there are no more lease payments, the savings will be that much greater. The lessee will find that providing accountant-prepared financial statements will add appeal to the numbers being examined by the lessor's credit department, which in turn will make an approval easier.

As technology advances, there will be a greater demand for leasing equipment in supermarkets. Labor savings are substantial when an employee can be replaced with leased equipment. Machines don't mind working overtime, hardly ever call in sick and never ask for raises. A comparison must be made between the monthly lease payment and the monthly cost of labor. One example of savings is the presence of magnetic price scanners that speed up the checkout process at supermarkets and require fewer employees to process the same sales.

Michael Gutter is a sales manager at Gramercy Leasing Services, Inc, a subsidiary of Atlantic Bank of New York.

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