“It was a newer model with some extra bells and whistles that we needed,” says Dockus, director of operations for Superior Tool Co. The purchase price “was a little more than we wanted to go for. Leasing has worked for us in the past. If it’s not broke, don’t fix it.”
Leasing is an option that companies chosen in increasing numbers in the past decade, with an annual 12.5 percent growth rate.
“There are several reasons a corporation looks at a lease versus traditional term loan,” says Chris Karwoski, senior vice president with National City Bank. “It’s a lower after-tax cost for equipment. We, oftentimes, are a more efficient user of tax benefits than the lessee. We will finance 100 percent of the asset. Last, in terms of technology types of equipment, whether it’s MRIs or data processing equipment, there is oftentimes an obsolescent protection.”
For Superior Tool Co., which manufactures and assembles plumbing hand tools, it was the desperate need for a new vehicle.
“The truck was wearing down after six years of use,” Dockus says. “We use it every day, almost all day long, taking a forklift on and off. The use of that, after six, seven years, you get into high maintenance costs. That’s one of the reasons we do lease. It gives us the option at the end.”
Leasing also gives the company more flexibility as it grows, she says.
“Some companies are just unable to use or efficiently use depreciation,” Karwoski says. “For instance they are carrying a potential loss during the terms of the lease or they might be in the alternative minimum tax where depreciation is a preference item. A corporation the size of National City is a high tax bracket, federal income tax payer. We typically will buy those tax benefits and exchange them for lower lease payments.
“We’ve done, through our small-ticket leasing program, something as small as a $5,000 server up to something in excess of $100 million for Great Lakes freighters and large rail-car consortiums.”
National City bills out 35,000 invoices monthly to corporations and companies throughout the United States and Canada. That represents nearly 2,500 leasing clients; most companies have multiple leases.
Karwoski recently completed a deal with a tool-and-die company for $1.5 million worth of computer numerical control machines.
“They needed off balance sheet treatment,” he says. “Certainly a term-loan wouldn’t provide them with that. In addition, they were looking for the lowest after-tax cost. Leasing did provide them with both of those.
“Our lease was approximately 90 basis points lower than the traditional term debt option, and that’s over the life of the lease.”
Those kind of savings explain why four out of every five companies will lease equipment this year, totaling $229 billion in leases.
“Our leasing portfolio at National City is about a $5 billion portfolio,” Karwoski says. “We’re one of the fastest-growing bank-owned leasing companies in the U.S., if not the fastest.”
Superior Tool leases only its truck, but with each new deal, the company improves the relationship with its leasing partner.
“We end up with a long-term relationship with the leasing company,” Dockus says. “We have better negotiating (experiences). They know who we are. We are using our leasing company to do our maintenance on it. That helps maintain the relationship.”