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WHAT IS EQUIPMENT FINANCING AND LEASING?

When you want to finance or lease equipment as a small business there are a couple of different ways to do so. The most important thing to understand is that just about any asset used to conduct a business could be considered “equipment.” You have the choice to either lease or finance an equipment acquisition.

For many years the two methods were very different from an accounting standpoint, but after recent changes to the Generally Accepted Accounting Standards, they are now pretty close to the same thing. Although the differences are subtle this blog post discusses what they mean and how they can help you make the best decision when your business needs equipment.

What do you consider equipment? By definition, any tangible assets, other than real property or the building in which you work could be considered business equipment. This includes just about everything from heavy equipment to custom or prepackaged software could be financed or leased.

What is equipment financing and leasing?

When you finance you own the asset and provide it as collateral for a loan.

When you lease, the leasing company owns the asset and allows you to use it for a monthly fee. Generally, at the end of the initial term of the lease, the asset ownership converts to you for a nominal fee, usually $1.00. If you choose to lease be sure that you carefully read the document that pertains to ‘equipment ownership’ and what you must do to advise your leasing company of your intent to buy the equipment at the end of the lease term.

Both Equipment Financing and Equipment Leasing accomplish the same thing, they allow you to add the equipment you need to grow your business or simply replace an asset for a fixed monthly expense. In our opinion, financing is much cleaner and safer than leasing. If you want more detail on this just call and we’ll gladly answer your questions.

Let Charter Capital help you connect with the best source of funding for your business.  Call or email us today!

NEED ACCESS TO EQUIPMENT FINANCING?

At one time or another, just about every active business will face the challenge of replacing an old piece of equipment or a software program or acquiring new widget machine to help keep their business competitive or to accommodate growth.  These are good challenges to have.  The challenge that’s not so good is figuring out how you’re going to pay for it.  What you really need it to know what your options are and that’s where Charter Capital can help.

Learn HowClick Here

When faced with paying for a new piece of equipment most small business owners simply defer to what they believe is the cheapest solution and that’s their bank.  That may be the cheapest solution and it may even be the best solution but there are about a gazillion reasons why it might not.  A few years ago, we wrote an article titled “Stuff Most Bankers Won’t Tell You” and despite the passage of time and lots of new banking and lending regulations, all of the reasons outlined in that article remain true today.  If you would like to learn what they are just, click here. 

The article deals with things that most business owners and managers simply don’t know about banks but ought to.  What the article does not address is ……If not my bank then who?  Answer: Charter Capital because we provide our customers with financing options.

For over 40 years we have been developing relationships with hundreds of banks, commercial finance companies, and private investment groups.  During that time, we’ve focused on what these lenders actually do rather than what they say they do.  We’ve studied, tracked and analyzed how each lender approaches and values things like credit, collateral, location, industry, financial condition, and many other components.  In fact, we created a matrix that identifies each lender in our network and how they react to 41 separate criteria for their approve/decline decision.  At this point, we know our lenders pretty well and that helps us help you decide which one is best for you.

When a customer applies for a loan or a lease, we create an individual transaction profile that identifies all of the major decision components used by our lenders.  We match that against profile against our Matrix to determine the best lenders for that customer’s specific need and present that information to our customer so they can make an intelligent choice. 

Let Charter Capital help you connect with the best source of funding for your business.  Call or email us today!

NEW GUIDELINE ON LEASE ACCOUNTING

A few thoughts and cautions on the Financial Accounting Standards Board’s New Guideline On Lease Accounting.

The FASB (Financial Accounting Standards Board) makes changes all the time about how you have to prepare your business financial statements in order to comply with generally accepted accounting standards. Most of them are technical and don’t really affect your day-to-day business. We think this New Guideline for Leases is a different kind of animal and we’re pretty sure it will prove to be very punitive for many of the unprepared.

Before this new guideline came out, businesses had a certain latitude on how they accounted for just about any equipment financing that was documented as a Lease. Now there is no choice and unless a lease has very specific structure characteristics (which most do not), the new guideline requires that you account for it as a loan and not a lease. This is true not only for any new financing but in most cases, you will have to change how you report your existing equipment obligations as well.  

The Bad News

Your financial statements will reflect more debt than they did previously and that is not good.  As your debt increases, and it most likely will, your Debt to Worth ratio will change. This ratio is one of the most common barometers used by banks and commercial lenders in determining which credit requests they will approve and which they will decline. This ratio is also a factor in determining what rate you will pay for a commercial loan. So, not only does more debt on your balance sheet make it harder to qualify for a loan but also it likely will be a lot more expensive to borrow if you do qualify.

The Really Bad News

Your Debt To Worth ratio changes it is possible that your new ratio will throw you into a technical default of your existing borrowing covenants. This means your bank or commercial lender has the right to call your loan. Remember in 2008, when the real estate values plummeted across the country? Numerous small business owners that used home equity lines to finance their businesses were caught off guard and were called upon to pay down or pay off their loans. Too many people lost their homes because the new loan to value ratio created a technical default. It could happen again and if it does your options will be to pay off the loan, negotiate new terms of borrowing (read higher rates), or inject new capital into your business to increase your ratio.

Be smart, have your accountant prepare a forward-looking financial statement using the new guidelines and calculate your Debt To Worth ratio. Then review your loan and line documents. If you’re out of compliance or will become out of compliance, contact your bank right now and get ahead of this.   

To get a better understanding of this new standard please visit the Financial Accounting Standards Board website here.

SECTION 179 INCREASES TO 1 MILLION RETROACTIVE to 9/27/2017

Last month, The Tax Cuts and Jobs Act was signed into law.

Our friend Kit Menkin explains how the bill affects Section 179 and what this means for your business.

With the passage and signing into law of H.R.1, aka, The Tax Cuts and Jobs Act, the deduction limit for Section 179 increases from $500,000 to $1,000,000 for 2018 and beyond. The limit on equipment purchases likewise has increased, from $2 million to $2.5 million. In addition, the deduction now includes any of the following improvements to existing nonresidential property (i.e., the improvement must be placed in service after the date the property itself was first placed in service): roofs; heating, air-conditioning, and ventilation systems; fire protection, alarm, and security systems.

Further, the bonus depreciation increases from 50% to 100%. This part is retroactive to 9/27/2017, and is good through 2022. The bonus depreciation also now includes used equipment.

Nolo.com states: Bonus depreciation allows a business owner to deduct a substantial amount of a new long-term asset’s cost in the first year, instead of depreciating the cost over many years. The bonus depreciation amount was set at 50% for 2015 through 2017 under the PATH Act. With 50% bonus depreciation, you could deduct 50% of the cost of an asset in the first year and the remainder over later years using regular depreciation. Bonus depreciation was scheduled to expire in 2020 after being phased down to 40% in 2018 and 30% in 2019.

The Tax Cuts and Jobs Act has increased first-year bonus depreciation to 100%. This goes into effect for long-term assets placed in service after September 27, 2017. In another significant change under the new tax law, you can use bonus depreciation for purchases of new or used property. Under prior law, you could only use bonus depreciation for new property.

The 100% bonus depreciation amount remains in effect until January 1, 2023. In later years, the first-year bonus depreciation deduction amount goes down, as follows:

80% for property placed in service after December 31, 2022 and before January 1, 2024.
60% for property placed in service after December 31, 2023 and before January 1, 2025.
40% for property placed in service after December 31, 2024 and before January1, 2026.
20% for property placed in service after December 31, 2025 and before January 1, 2027.
To qualify for bonus depreciation, property classified as “listed property” under the tax code must be used over 50% of the time for business. Under the Tax Cuts and Jobs Acts, computers will no longer be classified as listed property. Thus, bonus depreciation may be used to deduct computers used less than 50% of the time for business starting in 2018.

Leasing News advises for further clarification; contact your Tax Accountant or Certified Public Accountant.

 

By Kit Menkin, Publisher and Editor-in-Chief of The Leasing News.

A TRUE LEASING HORROR STORY

Many years ago, I signed up to play golf in a charity tournament. It was a good cause and I loved to play so I sent in my donation and blocked out the day on my calendar. The day of the tournament I showed up and found I was playing in a group of men, most of whom I didn’t know. They seemed like a typical group of small business owners and managers and I was more than ready to enjoy the day.

I don’t remember the exact format but it was a two-man team game I was paired with a big guy, maybe 6’4” and I was hoping for a few monstrous drives. We played a few holes, telling a few jokes, cheering for each other good naturedly and creating an overall feeling of camaraderie. He liked my putting and I loved his drives.

Eventually, we got around to the obligatory “where are you from?”, “what do you do?”, “what’s your handicap?” and so on. When I told him that I was in the equipment leasing business his smile disappeared and was replaced by a distinctly sour expression. It was as though I said.,..,.,”your baby is ugly”. The light banter that had been present during the first few holes also disappeared. I was more than a little put off by this abrupt change in his attitude so after a few holes I asked what had caused it. I’ve never been very shy. After a thoughtful moment, he let out a sigh and explained that he had just had a particularly frustrating and expensive experience with a commercial equipment leasing company and simply the thought of that experience put a dark cloud over his head. He realized he was being kind of foolish (his words not mine) and apologized. We dropped the subject without further discussion and had a pretty nice time thereafter. We both played well and had a very enjoyable round of golf.

Later that day we met for a drink at the hotel bar and proceeded to talk about our game and how we had ‘ham and egged it’ to tie for first place. We talked baseball, basketball and eventually…….equipment leasing. It turned out that he had leased a telephone system a few years earlier from a company that I was all too familiar with. He made all of his payments timely, sent in his property tax when due, and did those things he was required to do under the agreement. When he mailed in his final lease payment he included a nice little letter asking what he needed to do to exercise his option to buy the equipment. He had always intended to purchase the equipment and in fact had negotiated to do so before he ever signed his contract. The negotiated price was $1.00, commonly referred to as a “bargain option”, and was evidenced by a letter signed by the General Manager of the leasing company.

After a week without a reply to his letter he called the leasing company and was referred to a residual clerk. He had barely finished telling the clerk why he was calling when the clerk rattled off what sounded like a much practiced response. In essence and much to his astonishment, he found that he had forfeited his option because he hadn’t advised the leasing company of his intention to exercise the option within the timeframe detailed in the agreement small print. The clerk proceeded to quote him three separate paragraphs in the lease documentation located in three separate Sections of the Lease. Sure enough when read together and with the vocabulary of a lawyer these three paragraphs required him to send a certified letter not more than six months and not less than five months prior to the expiration of the lease term advising of his desire and intention to actually buy the equipment for $1.00. To add insult to injury, the clerk advised him that because he hadn’t complied with this requirement, the lease had automatically renewed and that he was now responsible for twelve more payments than he had originally agreed to. This is commonly referred to as an ‘evergreen clause’. The story went on to describe several failed attempts to speak with the leasing salesperson he originally negotiated with (who, he found out later, no longer worked at that company), several failed attempts to speak with the General Manager (who, he found out later also no longer worked for that company) and several calls to the principals of the business, who simply would never come to the phone. It continued with letters, lawyers, credit reporting problems and finally a lawsuit …. which he, unfortunately lost. The final tally was, instead of paying $1.00 for a telephone system that he had actually already paid for, my new golf friend paid $11,000 in additional or extended rentals, approximately $600 in late fees, in excess of $3000 in legal fees and untold hours of wasted time and effort…..and a boatload of aggravation. Not a pretty story and unfortunately not an uncommon one.

I was curious why this fellow chose to do business with that particular leasing company in the first place. Since I’ve been in this business for a very long time I was pretty sure I knew the answer, but I asked it anyhow. The answer as expected was that “They had the lowest rate”. Apparently not in the long run.

I bought the guy another drink and we talked ‘golf’ for the rest of the evening.

NOTE: This story is far more common than most business people might expect. There are a number of leasing companies that simply stated, operate by a different set of rules than most and that have an entirely different objective than initially apparent. Before you sign on the dotted line and before you send any company a fee or deposit, make sure that you know exactly what you are agreeing to, exactly what the repayment terms are, exactly what your responsibilities are, exactly what you are, and perhaps most importantly, exactly whom you are dealing with. Then you can concentrate on really important things……. like your golf game.

FEES, FEES AND MORE FEES

Today there are fees for just about everything we do and in the business environment many are justified and many are simply a way for a company to make extra revenue. Banks and other commercial lenders are notorious for their fees, many of which are not disclosed to a borrower until they are signing loan documents.

We believe you should know what fees are being charged and what they are for. We’ve compiled the fee list below so the next time you apply for a commercial lease or loan you’ll be a little smarter.

• Documentation Fees – this is a fee most commercial lenders charge for preparing a set of documents. Most lenders will charge between $150 and $200 and sometimes higher due to the complexity of a specific situation. Some commercial brokers double or triple this and keep the difference.

• Inspection Fees – this is a fee for doing a physical inspection of the asset once it is in place in a customer’s facility. It protects the lender and the customer and generally costs between $150 and $200. Some commercial brokers increase this amount and keep the difference.

• Application Fees – only a few companies charge Application Fees and it’s simply a way to make more money.

• Search Fees – if you are financing a piece of equipment that was acquired from a private party seller rather than an equipment vendor or if you have had possession of the asset for more than 15 days a Uniform Commercial Search is generally required to verify the lender’ lien is a priority and not subject to any preexisting liens. The cost of such a search can vary from state to state and on the number of pages in the resulting search.

• Credit Checking Fees – only a few companies charge Credit Checking Fees and it’s simply a way to make more money.

• Success Fees – this is a fee that is negotiated between you and the lease/loan broker and generally represents his fee for finding you a lease or loan. It is generally dependent upon the amount of the asset cost and should normally range from 2% of the equipment cost for transactions over $500k to 5% of the equipment cost for transactions under $500k. Remember these fees are negotiable.

• Commitment Fees – this fee is given to a commercial lease or loan broker or lender to insure that you will accept and complete a lease or loan under a specific set of terms. This is generally accompanied by a Commitment Agreement which is a document that states the amount of the borrowing, the repayment terms, who will guaranty the obligation, and any contingencies. If the broker or lender performs and provides an approval in accordance with those terms and you decide not to proceed with the lease or loan the Commitment Fee will be retained. If you are not provided with an approval as detailed in the Commitment Agreement your fee should be returned. READ THESE DOCUEMTNS CAREFULLY.

• Titling Fees – these fees are usually reserved for the financing of titled vehicles. Amounts depend upon the type of vehicle and the state in which titling takes place

• Processing Fees – only a few companies charge Processing Fees and it’s simply a way to make more money.

• Miscellaneous Fees – which can be almost anything and it’s simply a way to make more money.

When applying for any lease or loan ask the lender to enumerate any and all fees or charges. Remember fees and charges are generally negotiable.

We offer this informational document as our opinion based on over 40 years of experience in the commercial finance industry and suggest that you to use it as a part of your decision making process. As with all important decisions, especially financial decisions, we also suggest that you consider all aspects carefully and consult with your attorney or accountant or other party who is knowledgeable about financial matters when considering entering into a legally binding agreement.

PRE-APPROVED OR APPROVED?

Have you ever received a letter from a commercial leasing or finance company congratulating you because your company has been Pre-Approved for some amount, usually $75,000 or $100,000 or $150,000?

I have and so have most companies that have more than ten employees, annual revenues in excess of $3 million, generally good pay habits and a good Dun & Bradstreet rating. If you have received such a letter the good news is that you made the “A” list but the bad news is that PRE-APPROVED doesn’t really mean anything. The truth is that you still have to fill out an application for credit and still have to qualify for the amount you are seeking to borrow or lease. If you stop to think about it PRE-APPROVED literally means BEFORE APPROVAL although most commercial lenders won’t tell you that.

Companies that use the PRE-APPROVED tactic are misleading you by causing you think you have been approved for credit. That practice is generally frowned upon by most legitimate commercial lenders except credit card companies. These tactics are deceptive and those that use them will likely say or do just about anything to ‘win a deal’.

If you are approved for a commercial lease or a loan the company that has approved you should have no trouble sending you a formal notification stating clearly and absolutely that you are approved and what the exact terms and conditions of approval are. Unfortunately there are several commercial lenders and brokers that will tell you anything and encourage you to send them money or sign a set of documents that requires you to send them money. Once they have your funds they may increase your payments or shorten the term or require a significant down payment or security deposit or insist that your mother-in-law guaranty. They have your money and are now driving the bus.
• When you are told you are approved for a lease or a loan, get it in writing.

• Make sure it is exactly as you understood it to be.

• Make sure all the costs and expenses are identified.

• Make sure it says ALL of your funds will be returned if the lender or the broker doesn’t perform by a specific period of time and make sure it clearly identifies what “perform” means.

• Make sure you are dealing with a reputable company. Check with;
o the Better Business Bureau,
o Ripoff Report (search under company name followed by ‘complaints’,
o NAELB – National Association of Equipment Lease Brokers,
o NEFA – National Equipment Finance Association
o The Leasing News (search company name and complaints)
o Google search under company name followed by ‘complaints’

We offer this informational document as our opinion based on over 40 years of experience in the commercial finance industry and suggest that you to use it as a part of your decision making process. As with all important decisions, especially financial decisions, we also suggest that you consider all aspects carefully and consult with your attorney or accountant or other party who is knowledgeable about financial matters when considering entering into a legally binding agreement.

LOWER RATE BUT HIGHER PAYMENT – HUH?

The following is a true story.

Several years ago a potential customer approached us to do an equipment lease for slightly under $50,000 of equipment. The business was pretty well-established and provided video editing for movie and TV production companies in Southern California. The only problem was that the owner had recently divorced and (1) no longer owned a home and (2) had some slow payments as a result of the somewhat messy end to his marriage.

We evaluated the credit and submitted a formal request to one of our lenders and ended up approving and funding the lease at a pretty competitive rate especially given his recent personal credit hiccups.

A year later the customer came back to us for another lease and we again approved his credit and funded his request and were able to do so at a slightly lower rate than before.

The next year our customer called and told us he was once again getting some new equipment for slightly under $60,000 and would like us to quote. Apparently he had spoken to another broker or leasing company and they had offered a very attractive rate. We updated our credit information and found that his credit had actually slipped a bit. The D&B report showed some recent delinquency and a a small suit. Despite this we felt we could approve the request because the customer’s payment history with us was excellent. We quoted a lease based on what we felt was a reasonable cost of funds and a reasonable margin for a repeat customer. It turned out the all-in rate to the customer was approximately 9.0%.

Over the next few days it seemed like the customer fell off the face of the earth. No return emails and no return calls. A week or so later our salesperson finally made contact and was told by the customer that he had decided to go with another leasing broker because they had quoted him a rate of 6.5% and our rate was about 9.0%. We know our market and although we certainly do not ‘win’ every single opportunity we do win far more than our fair share and we know our competition and approximately what they can do and what they can’t. The broker this customer was working with was far less capable than we were and we knew without any doubt they could not approve this customer at 6.5%. We sent the customer an internal form we share with customers to use when comparing competing lease or
finance quotes.

A week or so later we contacted the customer and sure enough he used our form to compare our numbers with the competition. He discovered that we were requiring a monthly payment of $2,725.00 and the competition was requiring a payment of $2,815.00. That was a difference of $90.00 per month or $5,400.00 over the term of the lease. Obviously our proposal was better so we prepared a set of documents and emailed them to our customer fully expecting that we had won the deal.

A week after that we hadn’t received the signed documents so our salesperson called the customer to find out if there was a problem. To our jaw dropping astonishment this customer advised that he decided to go with the other company and when we asked him why, has answer was……. “You guys had a better payment but the other company had a better rate”.

We removed this contact from our database and decided it was probably best if we not compete on future opportunities.

We offer this informational document as our opinion based on over 40 years of experience in the commercial finance industry and suggest that you to use it as a part of your decision making process. As with all important decisions, especially financial decisions, we also suggest that you consider all aspects carefully and consult with your attorney or accountant or other party who is knowledgeable about financial matters when considering entering into a legally binding agreement.

INTERIM RENTS

Interim rent was originally conceived to compensate commercial lenders for the time their funds were invested beyond the traditional 30 days for the next first scheduled monthly payment of a lease. This concept is also employed in consumer real estate loans when ‘extra interest’ is charged for the days between an existing loan being paid off and the new loan becoming due. At its core this concept makes sense. Let’s assume a lender funds a loan or a lease on the first of the month and the next payment is scheduled on the 15th of the following month. Most lenders’ original calculations assume that payments will be made every 30 days and in the scenario above the first payment was actually due in 45 days. There are 15 days that the lender does not have the use of their funds and for which time they are not being compensated. So the logical solution is to pay the lender ‘interest’ at the same rate as the loan or lease is structured at for the extra 15 days. Seems fair but that’s not what’s being done by most commercial lenders.

Most commercial lenders will charge a proportional percentage of the full monthly payment (including interest AND principal) that corresponds to the percentage of a month the extra time the funds will remain outstanding. In the example used above the 15 days is one half of a month (30 days) so the lender charges an additional one half payment which not only includes interest but principal as well.

Example;
• 36 month loan for $100,000
• At 6% the repayment is $3,042 per month
• 6% interest for 15 days on a $100,000 loan is ¼% or $250.00
• The typical interim rent charged is ½ of a monthly payment or $1,521.00

And that’s an extra $1,271.00 out of your pocket and into the lenders pocket and rather than paying 6% for the extra 15 days you are really paying 36%.

We offer this informational document as our opinion based on over 40 years of experience in the commercial finance industry and suggest that you to use it as a part of your decision making process. As with all important decisions, especially financial decisions, we also suggest that you consider all aspects carefully and consult with your attorney or accountant or other party who is knowledgeable about financial matters when considering entering into a legally binding agreement.

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