Leasing Floor-care Equipment May Lead To Increased Profits
Watching finances is critical for all business owners, including building service contractors. Leasing floor-care equipment rather than buying the machine offers a number of advantages to help BSCs grow and prosper.
“It’s definitely a big help for cash flow,” says Dale Basel, president of Bob’s Janitorial Service & Supply Inc. in Topeka, Kan. “You don’t have to lay out a whole bunch of cash up front.”
Leasing can be beneficial for BSCs who are expanding into new accounts, says Basel. New equipment may be needed at each facility and paying $10,000 to $12,000 per machine may not be financially sensible. Taking advantage of a leasing program might ease that burden.
Leasing can be much more convenient too, says Kevin F. Clune, president of Clune & Company, an equipment leasing firm in Mission, Kan. Although a bank’s loan rate may be more attractive, leasing firms typically don’t require financial statements or a down payment, and many transactions can be processed in a matter of hours.
And, perhaps most importantly, it improves the bottom line.
“It makes your profits look better because you’re making smaller payments,” Clune says. Leasing also helps with a BSC’s tax situation.
“If the lease payment is structured properly, you can write it off just like the rent on your building,” Clune says. “Whatever you can write off faster is better.”
He also suggests that BSCs use their bank credit for their important business needs, and lease equipment that depreciates quickly.
Once BSCs decide to lease equipment rather than buy, there are a number of options to choose from. Lease terms can run from two to five years; typical buyout options include $1 buyout and the 10 percent plan (both refer to the additional amount needed to buy the equipment at the conclusion of the lease), explains Tom Murphy, sales manager for RoVic Inc. in Manchester, Conn.
Which program the BSC chooses depends on needs and resources at the time of the lease. Generally speaking, the lower the buyout cost, the higher the monthly fee.
BSCs typically try to match the lease program with their cleaning contract, Murphy says. The most common arrangement is the $1 buyout for 36 months.
Nearly any item can be leased, though autoscrubbers are one of the more common pieces of equipment leased. One determining factor, experts say, tends to be the value of the item. Clune says that BSCs are more likely to lease equipment costing more than $5,000. Basel adds that most of his leases for equipment run in the $10,000 to $15,000 range.
Another factor to consider is how fast the machine’s value depreciates.
“If the BSC believes that either the machine is going to be worn out or obsolete within three years, then it really doesn’t make a whole lot of sense to pay with cash,” Clune says.
Leasing programs often include warranties, but they vary by manufacturer. Many BSCs try to coordinate the warranty to coincide with their cleaning contract, according to Frank Felice, equipment specialist with AmSan in Cleveland, Ohio. BSCs may also purchase a service agreement, which covers tires, brushes, filters, and other parts not included in warranties.
“This keeps their machine running like new through the term of the lease,” he adds. The cost of the maintenance program is built into the lease payment.
Training is usually offered as well, Felice says. Technicians or sales people will set up or install the equipment, and show staff how to properly operate and clean the equipment.
Things to consider
There are no significant drawbacks to leasing, experts say, but BSCs should be aware that interest rates are higher than what they could get from a bank. Plus, the final cost of the equipment is greater than it would be if they purchased with cash.
But the smaller payment up front can be quite beneficial, Murphy says. For example, BSCs could take $1,000 that would’ve gone toward a $7,000 purchase and instead invest it into a marketing effort that returns $13,000 in sales.
“It’s really easy to call that one,” Murphy says.
Since leasing isn’t all that common in the cleaning industry, many BSCs are still confused about the benefits leasing offers. Product distributors can help translate those values.
“The most important part is trying to understand what the customer is trying to accomplish,” Murphy says, “and use leasing as part of a total program to get them where they want to be.”
Also, during those times when cash is tight, a leasing program can help keep a contractor’s business going. When choosing whether to buy or lease, says Murphy, BSCs need to ask themselves, “What’s the best choice for what we’re trying to do?”
As with any lease, BSCs are responsible for the payments, even if they lose their cleaning contract or otherwise fall on hard times. Clune says that a leasing company may permit the BSC to sell the equipment in those situations. He strongly advises against defaulting, as that will have a negative impact on the person’s credit history.
Clune further points out that the leasing industry is unregulated. While leasing is a viable alternative, he advises BSCs to read the lease agreement carefully before signing. Some firms will bury additional charges in the lease, causing the monthly payment to be much greater than the BSC anticipated.
The next time a new piece of expensive equipment is needed, BSCs should talk to their local jan/san distributor to see if leasing is available. It may be a more affordable option for servicing accounts.
Thomas R. Fuszard is a business writer based in New Berlin, Wis.
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