Focus: Financing your forklift. Feature article written by Forkliftaction News

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Focus: Financing your forklift

Local Feature Article

- 17 Mar 2005 ( #200 )

8 min read

David Knight from De Lage Landen.

Research shows 80 per cent of US companies choose to lease some or all of their equipment. This year alone, more than USD208 billion in equipment will be leased in the US. (source: Aspen Corporate Funding)

Forkliftaction.com News reporter Christine Liew spoke to De Lage Landen's David Knight, who has 31 years' experience in the leasing and finance business, about leasing equipment in the US.

Leasing

In the real estate industry, the terms rent and lease are frequently used interchangeably. This is often true in the equipment financing world as well. Someone may say they are renting equipment when in fact they are leasing them. The language on a contract may refer to a monthly rent when it is actually a lease. So is there a difference between renting and leasing?

David Knight said renting was usually for a shorter period such as hours, days, weeks or even months while leasing usually went from 24 months to 72 months. Monthly rental payments were also substantially higher than monthly leasing payments.

"For example, a 5000lb pneumatic forklift could rent for USD1000 a month but, for a 60-month lease contract, cost only USD300 a month," he said. Rental payments could also go up at any time whereas lease payments were fixed for the entire term.

"Renting is a good option for companies that need forklifts for limited time frames such as during repairs to existing units, where it does not make economic sense to sign a long-term obligation," Knight said.

Operating lease

An operating lease is designed for businesses that want the lowest monthly payment with the greatest flexibility at the end of the lease term. The lessor (funding source) retains ownership of the equipment for tax purposes and the lessee typically claims all lease payments as an operating expense or tax deduction. (source: Aspen Corporate Funding)

Knight said an operating lease was the most popular option with large forklift fleet users. The lease's residual value feature enabled the end user to have a lower monthly payment because the lessor (leasing companies like De Lage Landen and Aspen Corporate Funding) took the residual value risk.

"Once the original term of the lease has expired the end user returns the forklift to the leasing company," he said.

Lessees may have the option at the end of the lease term to purchase the equipment at its fair market value, return it with no further obligation, upgrade to the latest equipment by entering into a new lease or renew the lease at a lower monthly payment.

The lease-end options that come with the operating lease help to guard against obsolescence.

"Normally when a company buys a forklift for cash or uses a finance lease, they tend to forget about the asset and keep it too long. Statistics show that companies that buy their forklift fleets keep them on average seven to 12 years," Knight said.

"In most cases this is well beyond the products' useful economic life. Maintenance expenses in later years far outweigh the cost of new products and forklift manufacturers are always improving their products.

"Operating leases give the end user many options. When an operating lease terminates, it forces the end user to take a look at their current situation.

"They will evaluate their current needs and order new units or extend the fleet they have for a few months or longer. Most times leasing companies will reduce the monthly lease payments on extensions. End users may also choose to buy some or all of the maturing lease units."

Finance lease

The finance lease is generally for businesses that intend to own the equipment once the lease term ends. The lessee (end user) claims the benefits of ownership for tax purposes, although the funding source is the actual owner. This enables the end user to claim depreciation and interest expense deductions.

Full cost of the equipment is spread over monthly payments and there is no residual value due at the end of the term. Because of that, lease payments for a finance lease are higher than for an operating lease.

Knight said the finance lease was very similar to a true loan except down payments (deposits) were required for loans, but not finance leases.

"A finance or dollar out option lease is similar to a loan in many respects. However, a 10 per cent to 20 per cent down payment is required for many loans, whereas a down payment is not required at all with a finance lease.

"The contractual terms between this lease and a loan are also different. For a true loan, the contract lists the purchase price and the down payment. For the lease, all it says is X monthly payment for X number of months.

"With a loan the purchaser is shown as the owner while the funding source is shown as the lien holder on public records. With finance leases, the leasing company is the owner on record until the contract is paid in full," he said.

An Ownership Mentality

Knight said the term lease was generic (especially when crossing regions) and end users should exercise caution when making their selections.

He said operating leases were not widely used in Europe and Asia and, instead, Europeans had a financial option called Contract for Hire that was a hybrid of leasing options popular in the US.

"The European and Asian markets prefer finance lease options. They have a higher propensity to own equipment than the US does. It's to do with the way they've always done business ... there's a bit of an ownership mentality there," he said.

Ten Reasons to Lease

1) Conserve working capital.
2) Off balance sheet accounting treatment.
3) No down payment requirement.
4) Flexible structuring options.
5) Leaves bank working capital operating lines open.
6) Monthly operating lease payments are lower than traditional loans.
7) End user doesn't need to dispose of equipment at end of term.
8) End user may be entitled to significant tax advantages.
9) Monthly lease payments on operating leases are expensed.
10) Helps reduce obsolescence.

The main reason

The bottom line in any business is money - how can I get the best equipment to make more money for me, how can I finance my equipment so I still have money to make more money, etc. So, it's no surprise that Knight said money was the main reason US businesses chose to lease equipment, with many going for the operating lease option.

"Forklift users have found if they buy a forklift it really puts them in the forklift business of buying and selling units rather than focusing on what their business is really there for. Studies have shown that fleet users that buy their units rather than leasing keep them much longer than is economically feasible, in most cases," he said.

"It's all about money, how I can obtain the best equipment for the best value. Notice I didn't say for the cheapest payment as there are many components determining the best value.

"Fleet users large and small want to minimise costs while ensuring the highest amount of up time. They have found operating leases give them the financial vehicle best suited to give them all the options they are looking for.

"An end user must weigh several factors. They of course want a low payment. End users should also review their responsibilities at the end of the lease to ensure they will not have a huge bill they were not expecting," Knight said.

"They need to consider maintenance costs for the equipment they are leasing. Some maintenance providers will quote a very low maintenance payment and actually stop performing maintenance in the later months of the contract when expenses are high."

When leasing is not recommended

There are some applications where leasing may not be the best option.

Knight said his company usually surveyed a potential customer on how they planned to use their equipment and in what environments.

"If the end user is a foundry where operating conditions are very harsh and dirty, leasing is most likely not the best option because the forklift would have little or no resale value at the end of the lease. On the other hand if the end user were a warehouse with concrete floors, and had trained operators that work one shift a week, it would be an excellent candidate," he said.

Customers with a high hour application would need to consider a shorter lease term, like 24 or 36 months, as higher usage caused the equipment value to depreciate.

Finance companies

Companies like De Lage Landen and Aspen Corporate Funding own the equipment they lease to end users. When De Lage Landen enters into a lease agreement, it either buys the equipment from a franchised dealer or direct from a manufacturer.

When asked if De Lage Landen would also have a finance lease arrangement with the dealer and manufacturer, Knight explained:

"Manufacturers have different financing requirements that entail capital loans for revolving lines. They typically do not have need for finance leases and this is more the function of the dealer."

***
David Knight is vice president for national accounts in materials handling and construction for De Lage Landen Financial Services. He has held management positions with Ford Motor Credit, Marine Midland Bank and Toyota Financial Services. Before administering the forklift leasing and fleet management programs for De Lage Landen's major accounts, he was financial merchandising consultant to Toyota Material Handling USA. He has had more than 31 years' experience in the leasing and finance business.

De Lage Landen is a Netherlands-based provider of international leasing solutions with offices in more than 20 countries.

Forkliftaction.com would also like to thank Ian Ogilvie and Peter Somerville from Materials Handling Finance Pty Ltd for providing background information for this feature.

Focus: Financing your forklift

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