Leasing vs. Buying

You may think that the decision to lease or buy is a non-issue in this down economy. Who's buying equipment? But you would be mistaken. While equipment sales have plummeted since last fall, many printers with excellent credit ratings and good cash flow are finding that this is the perfect time to make a deal for equipment. However, the decision to lease or buy is still an important one with long-ranging ramifications. Do you want to own the equipment outright and receive tax benefits as it depreciates, or lease the equipment for a set amount of years and spread out the payments until new technology makes it obsolete?

Large capital equipment suppliers have their own finance arms or close relationships with lending organizations. Some equipment manufacturers are creating enticing financing options to spur sales. PressAccess, a supplier of pre-owned printing equipment, announced in January a no-money-down financing option with zero payments for six months to qualified customers. This financing option is for qualified customers only, subject to credit approval, and applies to PressAccess' entire inventory of presses and finishing equipment. "Values on used equipment have never been better than they are today, and the cost of financing will only go up over time," claimed Clyde Tillman, president.

Finding a Lender

While news reports announce that bank lending has come to a halt, there are lenders willing to negotiate deals. For example, People's Capital and Leasing Corp. in Waterbury, Conn. is working with the graphic arts industry. "We are in a lending mode," said Michael (Micky) Urquhart, senior vice president of sales for the graphic arts financial division for the equipment financier. "Those who aren't lending have either exited the market or don't have the capacity to loan. We have the financial stability and we're seeing good activity among printers." Urquhart reminds printers to explore all of their options before borrowing money, which includes such types as the Small Business Association, government-backed loans, and Economic Development Authority aid.

One printer who prefers to purchase rather than lease equipment is Design Distributors, a full-service sheetfed, web, and direct mail facility located in Deer Park, N.Y. "I either borrow money through my bank line of credit or pay cash," said Adam Avrick, president. "There is an accelerated depreciation on the equipment giving me tax advantages. However, in this economic climate, I'm maintaining a great relationship with my banker and our line of credit and I'm holding onto my cash. Cash is king in this recession."

Another printer who prefers to purchase equipment rather than lease is Print Tech LLC, a 30-year-old commercial and retail printer in Mountainside, N.J. "Most of our equipment is purchased because the accelerated depreciation benefit is very valuable," said Dan Schulz, chief financial officer and partner at Print Tech.

During the past several years, leasing has grown in popularity because it is seen as a cost-effective method to keep pace with rapidly changing technology and a way to preserve capital. "Prepress and digital equipment are more prone to being leased," said Joe Becker, a partner in MargolisBecker, a leading CPA firm providing financial and management services to the graphic communications industry. "Printers will want to lease because if they have problems with the equipment, they'll have more leverage with the manufacturer or if a new version is introduced, they'll want to re-negotiate the lease. But for large presses and bindery equipment, I recommend buying with cash or going to the bank for a loan."

There are five main reasons why printers choose to lease equipment versus purchasing it, according to Mary Redmond, president of Independent Lease Review and a speaker at many graphic arts seminars and trade shows. "Leasing allows a printer to have a lower down payment for the new equipment. This is important for printers in this recession who want to watch their cash flow. If you lease, the cost of entry is much less. Second, leasing allows a printer to spread their payments over a longer period of time. Again, it helps printers who need to manage their cash flow. Third, leasing allows a printer to not own equipment that may become obsolete, especially if they are buying digital equipment. Finally, leasing provides more than one source of lending, and the printer can take advantage of tax advantages if the lease is structured properly," she said.

If you are in the market to acquire new equipment, there are a number of guidelines to follow. Look for a variety of lending sources, not just from the equipment manufacturer. "Many printers make the big mistake of only taking financing from the equipment vendor," said Redmond. "Just as you seek out multiple sources of equipment, printers should seek out multiple sources for their financing." Learn to negotiate your contracts and leases, especially in this economic climate.
"I always have our attorney at my side when I'm signing a contract," noted Avrick. "But I've found that I'm able to make changes in my equipment purchase contracts that I've never been able to make before. Negotiate the points in your contract with the equipment vendors and banks."

Prepare a three-year financial and personal statement about your business for your bank or lender. Help your banker learn about your industry and make a case as to why you need this equipment. Too many printers, say experts, let it become a price-based decision or an emotional decision, instead of making sure they've got the best business solution.

Printers should also seek out different methods of financing equipment purchases. For example, the New Jersey Economic Development Authority (EDA) has been actively working with the graphic arts industry for years. The EDA is authorized by the IRS to issue bonds to help a wide range of businesses, including printers, and nonprofit groups borrow money on a long-term basis at favorable interest rates. Interest income earned by purchasers of tax-exempt bonds is exempt from both federal and state taxes; therefore, these savings are passed on to the borrower in the form of lower interest rates.

Finding Fixed-Rate Loans

The EDA has helped to finance millions of dollars worth of equipment for the printing industry. For example, Print Tech in Mountainside, N.J. used a $400,000 direct loan from the EDA (five-year term, 3 percent fixed interest) in December 2008 to enable the business to refinance higher-cost debt.

"I would highly recommend that printers should check into their own state's EDA," said Schulz at Print Tech. "At the end of the day, it was a good experience and a great vehicle for us. The only warning I would give is to be flexible with your closing dates. It took more months than we anticipated. But when it came to the closing date, it only took us 15 minutes. It went very smoothly."

In addition to Print Tech, the New Jersey EDA has recently helped Rutler Screen Printing Inc. of Phillipsburg to borrow $107,000 from PNC Bank with a 25 percent EDA guarantee under the New Jersey Business Growth Fund to purchase a new press to increase production; Challenge Printing Co. Inc. of Clifton to obtain $2 million in tax-exempt bond financing through the EDA in July 2007 to purchase printing and folding equipment so that it could maintain state-of-the-art capabilities serving the pharmaceutical industry; L.P. Thebault Co. of Parsippany to use $5.1 million in tax-exempt bond financing to acquire a new Heidelberg XL sheetfed press and renovate its building to accommodate the new equipment; and Hatteras Press of Tinton Falls to procure $2.3 million, 10-year, variable-rate, tax-exempt bonds to purchase a six-color offset press with coater to increase its productivity and efficiency.

State Funding Available

States are working very hard to stimulate capital investment and job creation. For example in New Jersey, the EDA announced $170 million in financing assistance to help state businesses face the fiscal challenges of the national economic crisis. The funding is being made available through two new programs: InvestNJ and Main Street Business Assistance programs.

The $120-million InvestNJ program includes two components. One component offers a $3,000 grant to N.J. businesses for each new job created and retained for one year. This element will provide up to $50 million, not to exceed $500,000 per grantee, for each eligible position created after Dec. 1, 2008 and before Jan. 1, 2011 by qualified businesses that experience a net increase in employment of eligible positions in the state during the same 12 consecutive months.

Another element of the program authorizes the payment of grants equal to 7 percent of a business' qualifying capital investment of at least $5,000 made prior to Jan. 1, 2011. Up to $70 million is available for capital investment grants, not to exceed $1 million per grantee, to fund expenses for the direct use and operation of a business.

The Main Street Business Assistance Program also has two parts—a loan participation and/or guarantee product that is being offered through participating banks and a line of credit guarantee offered through the EDA's 14 Preferred Lender partners. To qualify, borrowers must be in business for at least two years, maintain jobs in New Jersey, and meet other EDA eligibility requirements.

For term loans secured by fixed assets like buildings and equipment, the EDA will provide a maximum participation of 25 percent, or $1 million, in a bank loan and a maximum bank loan guarantee of 50 percent, up to $2 million. For working capital loans to cover operating expenses, the EDA will provide up to 25 percent of a bank loan, not to exceed $750,000, and a maximum guarantee of 50 percent, up to $1.5 million. The aggregate EDA exposure cannot exceed 50 percent of the total bank loan amount to a total maximum of $2 million. The interest rate on EDA loan participations are fixed at 5 percent for a maximum of five years. Borrowers also can use the Main Street program to refinance higher-interest debt.

The line of credit guarantee, which can be used for fixed assets or working capital, will be set at a maximum of 50 percent of the bank amount, up to a maximum of $250,000.

The Small Business Association (SBA) is another venue for printers to use as a financing tool. "The SBA is encouraging lending," said Carol C. Brennan, director of business development at BDC Capital/New England Certified Development Corp., which is a preferred SBA lender, and has been designated to expedite the processing of SBA loans for customers.

"We offer the popular SBA 504 program to businesses for owner-occupied property. SBA 504 loans are designed for projects ranging in size from $500,000 and up, and may be used for the purchase of land and buildings, new construction, renovation, and leasehold improvements, and acquisition of machinery and equipment. Borrowers get low-cost fixed rates with longer terms and low down payments. With an SBA 504 loan, a borrower obtains a first mortgage loan for usually 50 percent of the project from the bank. Then New England Certified provides a secondary loan (called a debenture) for the next 40 percent.

"Certain manufacturing entities are eligible for up to a $4 million debenture. All other industries are capped at $2 million. Up to 90 percent financing means the borrower typically provides only 10 percent equity for the project. Loan terms may extend as long as 20 years, and low fixed interest rates (fixed for 20 years for real estate; 10 years for equipment) are available on up to 40 percent of the project."

Brennan said that many printers are using the 504 to purchase real estate. Currently, the SBA 504 rates for January 2009 were 5.72 percent for 20 year term-real estate; and 5.07 percent for 10 year term-machinery and equipment.

Look for Local Support

Design Distributors has utilized a variety of methods to purchase new equipment. When the company decided to expand into direct mail in 1993, company management contacted the Town of Babylon's Industrial Development Agency to obtain reduced interest and enticements to stay on Long Island, plus a stipend from New York State. Four years ago when the firm purchased web press equipment, Avrick asked New York State to help lower the fixed rate with a bank.
Whatever method you choose to acquire new printing equipment, legal counsel review is a good idea, said experts. The contract signed for new equipment legally binds parties to certain actions and results, and more than likely, the contract involves a large sum of money and a substantial commitment.

Debora Toth is a freelance writer who has been writing about the graphic arts industry for 25 years. She also is a public relations specialist and operates Coastline Public Relations. She can be reached at [email protected].