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Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Andrew Tellijohn
March 2004

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Flex time


Flex time

Equipment leases help to free cash for fast-growing firms

by Jim Martyka  

Kelly Stucco Systems was growing at a tremendous rate, nearly doubling in size each year. But as most small-business owners know, the more you grow, the more you need to invest in the business.

There was little money left for the expensive machinery the plaster manufacturer needed to keep competing. So, the owners of the $1-million company looked into equipment leasing.

"We had done it a couple times in the past, but now we needed a trailer, a truck, a new lift — that's a lot of expense," says Chris Kelly, owner of the Burnsville-based company. "We looked into equipment leasing and we realized what an amazing opportunity it was. It saved us cash. The rates were better. And it worked out as a write-off for us. It was everything we needed."

For those reasons and more, small to mid-size businesses are finding equipment leasing to be an attractive financing option. Whether it's for huge industrial machinery or office chairs, just about everything can be leased through a bank or other creditor, as long as the lessee has a decent credit history.

While this option has been around for quite some time, small-business and banking experts say more owners are beginning to understand the value.

"It's still tempting to want to buy this equipment and own the asset, especially now when the interest rates are low. But more and more small businesses are taking the time to ask themselves if they really need to own it," says John Chrun, senior sales manager for Wells Fargo in Minnesota. "When they realize they don't, they start to see all the benefits of equipment leasing."

An equipment lease works as follows: A small business chooses a piece of equipment and the vendor who will supply it and then works out a price and performance requirements. The business then goes to a bank (or another type of financial institution) and works out an arrangement in which the bank will buy the equipment from the vendor and lease it to the small business for a set amount of time. The small business then makes a pre-determined monthly payment to the bank, while also making sure that the equipment stays in good condition.

Almost every major bank (and some small and mid-size ones) offer equipment-leasing services. Often, vendors themselves will also provide direct equipment leasing services. There are also independent brokers that can set up arrangements. But most experts agree that working with people experienced in the leases is the best option, because they know how to get the best rates and contract structure.

"We realize how important this is to small businesses," says Jason Korstange, senior vice president of investor relations at Minneapolis-based TCF Bank. "We can work with them and show them all of the benefits."

One of the major advantages of office equipment leasing is that it is considered to be very flexible. In most cases, the structure of the lease, the term, the rent and the end-of-lease options can be modified to fit any type of situation.

Different ways to pay
There are many different kinds of leases (and officials recommend exploring all options). The most common is a finance or money-over-money lease, which essentially means the lessee will pay monthly rent until the cost of the equipment and the lessor's fee is covered.

Other kinds include a capital lease, which is treated like a purchase on a small business's books; and a master lease, typically used when a company is leasing more than one piece of equipment. In a master lease, the rental period and rates are set up under a different contract, making them a bit more flexible over time.

Then of course, there are also basic operating leases and sale-leasebacks, where a piece of equipment owned by the lessee is sold to the lessor and then leased back to the lessee (mainly used so a small business can obtain quick cash).

"Whatever the product, banks typically will offer a number of different ways to use it," says John Boyd, a professor of finance at the University of Minnesota's Carlson School of Management. "They want to work with you because they want you as a customer, so it never hurts to explore all the options."

Experts say there are also a number of different ways these leases can be paid. There are the typical monthly plans that have a small business paying a standard price each month for the duration of the lease. There are also step payment plans, which means a small business will either pay more or less at first and then payments will increase or decrease over the course of the lease.

There are skip payment plans that allow a business the chance to not pay for one month out of the year, making up the difference in future payments. Along those lines, there are also seasonal leases, which recognize that certain times of the year might be better for small businesses than others. Thus, the small businesses pay more during those times than they do during off times. There are many other options, including standard balloon payments and quarterly rental payments.

"Most of our customers lease equipment because of the ease and convenience that we can offer when it comes to leasing," says Adrian Hebig, senior vice president and general manager at Minneapolis-based U.S. Bank.

The banking giant has seen steady growth in its equipment-leasing department. Currently, U.S. Bank has more than $700 million in assets in this department alone. "There is a quick turnaround and easy documentation for this type of leasing. And there are many more advantages."

As Hebig mentioned, there is typically a quick turnaround in equipment leasing with little to no initial cash paid up front. And any cash that is paid up front is typically applied to the periodic rental payments, which reduces the outstanding balance.

Another advantage is the expanded credit availability that such a lease offers. Provided the contract is structured in the right way, the lease does not appear on financial statements as a direct liability, which means a small business can preserve its borrowing availability with the bank and other creditors. For a small business that's just getting started, that's a huge advantage. At the same time, these types of lease can actually help a small business build good credit.

Rules are more flexible
Financial experts also say leasing is a way for small businesses to avoid certain financial restrictions that come with other loans or lines of credit. For example, some loans require the permission of an existing lender to do business with another lender. Or some loans require that a borrower maintain certain balances for the duration of the loan. Such is not the case with leasing.

"There are still rules that have to be followed, but leasing is a lot more open and flexible in just about every way," says John McQueen, chief operating officer for Minnesota at Wells Fargo. "Especially when it comes to the books. Most business owners don't realize what an opportunity it is to be able to write these leases off."

If a contract is structured properly, a lessee might be able to deduct the entire rental payment as an operating expense, reducing tax liability and actually reducing the overall cost of acquiring the equipment. Also, while the small business might not own the equipment, the owners receive all of the benefits of the warranty.

Still, the biggest reason small businesses are exploring this option comes down to cost.

"It was simply cheaper for us to do it this way and the bank made it a lot easier as well," says Kim Igo, chief financial officer for St. Paul-based Legend Technical Services Inc. The environmental lab decided to lease a majority of its lab equipment over its 12-year existence. "We had purchased some equipment, but the more we looked into leasing, the more sense it made. The process was easier. The rates were lower than loans and we could write it off. It simply made the most business sense."

While officials agree the leasing process can be easier, there is still a credit check and many of the same hoops a small business has to jump through to get a loan. As such, equipment leasing doesn't necessarily work for everyone.

"It's still a form of borrowing," Boyd says. "So there are going to be rules and restrictions."

Check the negatives
And there can be some disadvantages, especially in terms of overall cost. Basically, the rent a small business pays could make the overall cost of the equipment more expensive than a straight buy. And these lease agreements are ironclad, meaning a small business absolutely must pay the rent for the duration of the lease, even if they no longer need the equipment.

Then there is the fact that since the equipment is essentially rented, the small business is not accruing any equity on the piece. And while the small business doesn't own the equipment, it is responsible for all maintenance and insurance related to the equipment.

And of course, there are other ways to go about getting office equipment at a cheaper cost. If you don't mind used equipment, sometimes companies that are going out of business will hold auctions to sell off their equipment at bargain prices. The same is also true when major corporations hold liquidation sales.

As far as financing, there are several other options as well. Beyond paying cash or maxing out credit cards, there are a number of different types of loans, be it from the bank or organizations like the Small Business Administration, which can be used to open up a line of credit for office equipment.

But most banking officials still favor office equipment leases.

"It's actually very simple," McQueen says. "Most small to mid-sized businesses don't need to own this equipment. There are other things they can be using that money for. So, they look at all of the options and the convenience and the benefits that leasing offers and it's usually a simple decision."

jboyd@csom.umn.edu. John Chrun, Wells Fargo: 612.316.1392; john.chrun@wellsfargo.com. Adrian Hebig, U.S. Bank: 952.851.2500; Adrian.hebig@usbank.com. Kim Igo, Legend Technical Services Inc.: 651.642.1150. Jason Korstange, TCF Bank: 952.745.2755. John McQueen, Wells Fargo: 612.667.6616; john.m.mcqueen@wellsfargo.com