2 Points About Equipment Leasing

The lease does not show up as a long term debt on the financial statements of the business. The business will not own the equipment until the lease is over. Many companies resort to leasing equipment precisely because it does not show up as a debt – and thus makes the company more attractive to shareholders or potential investors.

Leasing allows companies to avoid budgetary or lack of authority restraints. Rather than spending large amounts of capital on an outright acquisition of equipment – which might need the approval of superiors and result in further delay – a company manager can lease the same equipment knowing that he is acting within his financial limits to do so.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Recession & Factoring

If the analysis of the 2 previous posts is correct (i.e. a potential US real estate meltdown, large numbers of mortgage defaults leading to a liquidity crisis), then it suggests that a US recession is taking shape – despite optimistic statements to the contrary from the Fed.

The first thing that will happen is a reduction in consumer spending as individual bankruptcies increase. Remember the average US consumer is maxed out on their credit cards as well. This will affect purchasing power and cause a retail slowdown.

This in turn will affect manufacturing. Production will slow, inventories will increase, job layoffs will start. While interest rates will remain relatively low, getting a business loan will become harder. Banks already hurt by mortgage defaults, will look for strong financial ability on the part of the business, to make the monthly payments and underlying assets to secure the loan.

Further, businesses will see that their customers are taking longer and longer to pay for goods and services supplied to them. Credit terms that are extended by one business to another, only make liquidity issues worse.

This is where Factoring can be helpful:

1. The business may find it hard to qualify for the bank loan. Factoring is not a loan. It is the outright sale of the invoices.

2. Reduced sales and rising payment times from existing customers mean slower, unpredictable cash flow. Factoring regulates cash flow, with almost immediately available cash.

3. Since Factoring is based on the creditworthiness of the customer, Factoring companies often provide helpful information about the credit standing of the customer. The business will know beforehand whether to do business with that customer and if so, on what terms.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Debacle In The Making 2

In case you thought that the subprime mortgages were solely to blame for high rates of default and the nervous jitters now surrounding the US economy, here’s something else to consider. In an article entitled “Why The Subprime Bust Will Spread” published in Asia Times Online on March 17, 2007, Henry C.K. Liu analysed the subprime contagion in the US and said:

"The nationwide proliferation of no-income-verification, interest-only, zero-equity and cash-out loans, while making financial sense in a rising market, is fatally toxic in a falling market, which will hit a speculative boom as surely as the sun will set. Since the money financing this housing bubble is sourced globally, a bursting of the US housing bubble will have dire consequences globally.

Through mortgage-backed securitization, banks now are mere loan intermediaries that assume no long-term risk on the risky loans they make, which are sold as securitized debt of unbundled levels of risk to institutional investors with varying risk appetite commensurate with their varying need for higher returns. But who are institutional investors? They are mostly pension funds that manage the money the US working public depends on for retirement. In other words, the aggregate retirement assets of the working public are exposed to the risk of the same working public defaulting on their house mortgages.

When a homeowner loses his or her home through default of its mortgage, the homeowner will also lose his or her retirement nest egg invested in the securitized mortgage pool, while the banks stay technically solvent. That is the hidden network of linked financial landmines in a housing bubble financed by mortgage-backed securitization to which no one until recently has been paying attention. The bursting of this housing bubble will act as a detonator for a massive pension crisis."

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Debacle In The Making

Unless you’ve been living under a rock, or just fallen out of a tree, the increasing rate of default in US Subprime Mortgages, could have far reaching implications.

It’s now apparent that well known banks and Wall Street firms are affected because they securitized the loans i.e. extended credit or short term loans to subprime lenders, or bought collateralized mortgages to hold in their own portfolio or, as is widely suspected, used subsidiary companies to write their own subprime mortgages.

Their stellar earnings that these finance houses reported over the past few years may be due to subprimes. The feeling is that Wall Street was just too close to subprime mortgage lenders, deliberately recommending to investors to buy their stock.

Simply put, every debt that the subprime mortgage companies owe to banks and Wall Street firms, are carried in the latter’s books as an asset. If the loans remain unpaid, the banks and Wall Street will have to “write down” the value of those assets from their Balance Sheets.

Effectively, billions of dollars of corporate value disappears – and that will shake the US economy.

It also results in a liquidity crisis for banks. They will reduce the number of new loans and impose tighter criteria for borrowers. Of course, it begs the question, why this wasn’t done earlier and to what extent subprime lenders, banks and Wall Street fuelled a bubble in the subprime market. In case you hadn’t realized, subprime mortgages are given to those with very damaged credit histories.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Criteria For Equipment Leasing

What the funding sources look for:

1. Size Of The Deal

The smaller deals, US5,000 - $100,000 stand a greater chance of being funded, compared to multi-million dollar items.

2. How Long Has The Business Been Operating?

In general, startups and new businesses less than 2 years old, would not usually be funded. There are exceptions and some funders will gladly consider newer companies and harder to fund deals.

However, if the startup itself is intending to provide “Vendor Leasing” i.e. a leasing option to its customers that are buying its products, financing might be available – so long as its customers have been in business much longer than the startup vendor.

3. Type Of Equipment

Computer equipment, telecommunications, construction equipment, turcks, machine tools and generic machinery that is regarded as having a defined value and considered to be a liquid asset, are the ones most easily funded.

Specific purpose-built machinery is less likely to be funded, as well as equipment that has an inherent liability issue e.g. tanning beds.

4. Creditworthiness Of Proposed Lessee

This is very important as it is the Lessee that will be making the payments on the Lease.

Bankruptcies, credit card delinquencies, tax liens and judgments could damage the chances of funding.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Equipment Leasing in the US

It would probably come as a surprise to a small and mid-sized business to discover that Equipment Leasing in the US is a 300 Billion Dollar industry, with huge growth potential.

Think about it: to acquire a business asset, you can either pay cash upfront, get a bank loan or enter into an Equipment Leasing contract.

Equipment Leasing is a form of Asset Based Lending. Not only is it a stand alone financing product, but it can be combined with other financing such as Factoring.

While Factoring generates predictable and faster cash flow, Equipment Leasing allows a business to make strategic decisions as to the USE of that cash. Why? Because it is the use – not the ownership – of the equipment that generates cash, and ultimately profits.

Given the rapid rate of technical obsolescence, a business might decide to lease the equipment rather than pay a wad of cash for it. This allows them to get the most use out of the equipment for the time they need it, while protecting their cash reserves.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved