Growth-oriented firms see leasing as tool for meeting evolving business needs
By David Niles, of SBT
As a firm with $22 million in annual sales, Oak Creek-based ElectroTek has the financial wherewithal to acquire the equipment it determines is necessary to remain competitive.
But back in its early years, its options were more limited. The capacity to purchase the costly equipment needed to compete just wasn’t there. Through leasing, however, ElectroTek got what it needed.
“Way back when we weren’t doing as well as we are today, it was almost a necessity to lease to get equipment in here,” said Mike Swerdlow, chief financial officer of the company at 7745 S. 10th St.
The company, which was started in the owner’s garage 31 years ago but now employs 150 people, makes bare circuit boards. Other firms purchase those boards and position chips and circuitry on them for use in a variety of computer-driven machinery.
“The majority of the equipment we need is pretty high-tech,” Swerdlow says. And it’s expensive, up to the $650,000 range.
ElectroTek still uses leasing to acquire equipment, but for a different reason than existed in its early years.
“Now, it’s more of a corporate situation in which we have fixed-asset covenants,” he notes, pointing out restrictions involved in traditional financial loans. “Leasing is a way around those restrictions. In effect, the money that goes to the leasing arrangements is like money spent on rentals.”
That’s a common reason for firms to lease, notes the Equipment Leasing Association (ELA), based in Arlington, Va. Such restrictions not only often accompany bank loans, but also some government-related finance programs such as Wisconsin’s Industrial Revenue Bonding, adds Peter Bapes, president of Associated Leasing in Menomonee Falls and a past president of the Wisconsin Association of Equipment Lessors. Bapes has worked with ElectroTek on leasing deals.
Such flexibility in addressing a firm’s financial status is one of the advantages of leasing, says Bapes.
Swerdlow also sees leasing as a way for ElectroTek to stay at the forefront of technology. “We want to stay competitive; when we look at a new piece of equipment, we know there will be something better in three years, and we know that in three years our customers will be demanding more from us.”
Such a growth-oriented approach to business ties in well with leasing, Bapes says, adding that aggressive small businesses often view leasing as the way to access the capital needed to exploit business opportunities. “They are often in situations in which the cash can’t keep up with the opportunities.”
By leasing, a company can make a relatively short-term commitment to a piece of equipment, and only pay for the value of its actual use.
That’s one of the four basic reasons to lease, Bapes says. “There’s technical obsolescence. But there’s also a trend toward application obsolescence; the piece of equipment still works, but the need it was acquired for no longer exists.”
The other three reasons for leasing are creation of usable capital, avoiding capital budgeting obstacles (the, “it’s not in the budget” problems), and balance-sheet situations in which the firm doesn’t want the acquisition to appear as debt.
It’s a common way to do business. “About 80% of all US companies have leased equipment. And 30% to 35% of all capital equipment is acquired through leasing,” Bapes points out. In late August, the ELA reported that, based on the volume of new business, a composite of equipment leasing companies grew 20% in 1998. Bank lessors experienced the largest growth with a 35.8% increase in new business volume, the ELA said, while independent leasing companies reported a 17.7% increase.
The ELA, in a survey of leasing firms, also found:
Oak Creek’s ElectroTek has several years of leasing experience. It’s experience that helps the firm more smoothly get what it needs to operate, Swerdlow says. “Peter knows us and knows our business, and that’s a tremendous advantage,” he says of Bapes. Because a knowledgeable relationship exists, ElectroTek can obtain leasing information much more quickly. “We could get a quote over the phone,” Swerdlow says.
Associated’s leasing operation has an average of more than two leases per customer, Bapes says. “The key for us is to get to know the business and to know the management.” The more the lessor knows of the operation, the more likely that transaction could be approved more quickly. “It can be as short as a morning,” Bapes says.
That’s the future of leasing, he adds. “In the future, I think it will be an even quicker decision-making process. Things are moving so fast. We have to be in a position to make the right decisions. But we have to respond to the high-paced competitive pressures which businesses are facing.”
9-9-1999 Small Business Times, Milwaukee
