Frequently Asked Questions
Westport Funding is pleased to provide some frequently asked questions and answers regarding equipment leasing and financing. If you don’t find your answer here, you can learn more about the types of leases we offer and our flexible, low cost financing solutions by visiting our equipment leasing services.
Why should I lease equipment instead of buying it?
Lease vs. Buy Decision Points:
- Conserve Working Capital: If you lease equipment you have the opportunity to invest the funds in an outside investment such as US Treasuries or internally in new product development, marketing or any other revenue generating area. An alternative use of the funds is almost always a more prudent return on your capital, therefore the lease is a wiser financial alternative.
- Off Balance Sheet Treatment: Most corporations are financially measured on a “Return on Assets” basis. If they purchase their computer equipment, it is put on the books and is part of their asset base. Conversely, if they lease their equipment with an operating lease, the assets are not on their books, and the payment is classified as an operating expense. This will give the company a better rate of return on assets since the asset base is lowered. In addition, the off balance sheet treatment is favorable for the loan covenants of a bank line of credit.
- Accounting term vs. technological useful life: Most entities are depreciating computer assets over a five year term but our experience is the actual useful life is 2-3 years. Disposition of the equipment at this point involves selling the equipment which then generally results in a book loss (book value is approximately 40% and the sale price is about 15 – 20%). Under this scenario you would be “married to your depreciation schedule” in determining when you could replace the equipment. In addition, when keeping the equipment longer than three years, clients generally incur large maintenance costs (out of warranty) and software support issues.
- Match expenses with revenue stream: Most firms have a need to match their expenses with their revenue stream. Purchasing the equipment requires using internal funds that could be otherwise invested in functions that generate revenue. Leasing equipment matches the payments against your revenue flow.
- Tax Benefits Due to the fact that the leased equipment belongs to the bank, the bank takes responsibility for paying taxes on the equipment. Since the lease payments are considered to be a payment for services and not a purchase of assets, the lessee can often file their lease payments as operating expenses instead of asset purchases.
- Avoid Technology Obsolescence: Technology leasing allows for scheduled upgrades of equipment throughout the duration or at the end of the leasing term. Since the lessee does not own the equipment they can return the equipment and replace it with new equipment with minimal hassle. When equipment is purchased outright, a company can become stuck with it and feel inclined to make do with the equipment they own rather than upgrading.
- Additional Considerations: The lease alternative allows you to refresh the equipment on a pre-planned timely basis which saves on support costs of maintaining many technology platforms within the organization. In addition, you have no need to be in the remarketing business with the lease.
A leverage lease is designed to drive the lease cost for you to the lowest monthly payment. The leasing company manages two partners behind the scenes, one wants interest income (usually a bank) and the other wants the residual value and the tax benefits. The combined “leverage” drives the payment down to the lowest cost for you.
What is a delayed start lease?
The number one reason for a delayed start lease is when you don’t have budget dollars in the current year. The equipment gets installed and paid for in the current year and the lease payments start in the following year when budget dollars are available.
What scenarios are good for uneven lease payments?
This structure is used when you want to avoid duplicate payments for your current lease and the new lease. We structure the new payment stream at a low amount or zero for a few months to accomodate the situation. It is also used for seasonal business whereby the lease costs need to vary by season.
An early buyout is a flexibility option on our leases that provides for shrinking the remaining interest out of a lease so that you can buy the equipment.
What is a mid-term rewrite on a lease?
This is our Unique Technology Upgrade Option. During the lease term if you wish to move to new equipment we will prepay the old committment, sell the old equipment for a credit and write a new lease on the new equipment.
What is your technology refresh lease?
This lease structure has built in points to allow you to purchase additional equipment and keep the monthly lease cost at a constant level. Hence you are “Refreshing” a portion of your equipment each year.
How do I add equipment to the lease?
We set up equipment leases with a Master Lease Agreement and lease schedules. This facilitates not only the first transaction, but allows for additional upgrades or equipment. In addition, we have an Enterprise Lease which provides for many batches of equipment to be consolidated each quarter.
Sales tax depends on the sales tax laws of each state. Most states require sales tax on the payments, in which case we give a resale certificate to the vendor to avoid tax on the purchase of the equipment.
Our equipment leases are set up with a fixed term, however we offer prepayment options whereby we shrink the interest out of the remaining payments and early buyout options. Most clients want to cancel because they want new equipment. We have a unique Technology Migration Option which allows you to move to new equipment during the lease term.
What are Power Purchasing Agreements (PPA’s)?
Power Purchase Agreements (PPA’s) are contracts between a utility company or other corporate entity and a wind turbine or solar panel owner. The contract guarantees a certain price per kWh for the electricity produced be paid to the owner of the equipment. There is typically a preset duration of 10 – 20 years on the contract.