Lease Is More Equipment leasing companies are flush with cash - and they want your business.

When Bill and Peggy Kensi took over Royal Laundry of Texas Inc.in 1996, the company was breaking even with sales of approximately$500,000. With some focused marketing efforts, the potential thecouple had seen in the business quickly materialized from suchcustomers as Electronic Data Systems Corp., American Airlines and alarge, local hospital group.

To answer the growing demand, the Kensis needed newequipment--and lots of it. Unfortunately, the cost of thedry-cleaning machines, automated folders and high-speed irons theyrequired totaled about $500,000.

The Kensis tried to get a loan from several local banks but wererejected and referred to the SBA. Unfortunately, the SBA'stimeline for loan approval was too lengthy for the Kensis, whoneeded their new equipment quickly. "Even though the businesswas almost 10 years old when we sought the loans, in the eyes ofthe bankers, it was technically a start-up because we had recentlypurchased it," Bill says. "None of them was willing tofinance a company that [in their eyes] was less than 2 yearsold."

And even if they could find a bank willing to finance astart-up, the Kensis' personal guarantee, which would berequired, wasn't worth much. "We had put everything we hadinto buying the business," says Bill. "We werecash-poor."

Enter Jim Lahti, president of Affiliated Corporate ServicesInc., a Lewisville, Texas, equipment leasing company. Lahti took aninterest in what the Kensis were trying to accomplish, and over thenext two years, he structured approximately seven leases that gotRoyal Laundry of Texas the equipment it needed.

In addition to running Affiliated Corporate Services, Lahti isalso president of the United Association of Equipment Leasing. Someof the greatest benefits of leasing, says Lahti, include rapidapproval times, no down payments, more favorable tax treatment thanwith asset purchases, the ability to finance hard costs and softcosts such as training and installation, and, finally, flexiblelease terms.

The differences between an equipment leasing company and a bankrun deep. "When a bank makes a loan, you can pretty much dowhat you want with the money," Lahti says. "And if youbuy equipment with the loan, you own it, depreciate it and pay backthe bank. But a leasing company buys and owns the equipment andrents it to you. So one of the primary differences isownership."

Another big difference is orientation. "What makes aleasing company more adventurous than a conventional lender,"says Lahti, "is that we don't do business under the samefederal regulations as a bank and we don't have the same audittrails as a bank." To underscore this difference, Lahti sayshis firm will lend up to $100,000 on a so-called "apponly" basis. This means the loan underlying the lease can beapproved on the basis of information provided on the application,which is generally no more complex than an ordinary credit cardapplication. Lahti says there are leasing companies that will dodeals of up to $250,000 on an app-only basis.

Finally, whereas most banks conduct a credit analysis--adetailed assessment of a business's financial position and itsability to repay a loan--leasing companies do not. Says Lahti,"We take the path of least resistance and try to figure outways to make loans even faster."

David R. Evanson's newest book about raising capital iscalled Where to Go When the Bank Says No: Alternatives forFinancing Your Business(Bloomberg Press). Call (800) 233-4830for ordering information. Art Beroff, a principal of BeroffAssociates in Howard Beach, New York, helps companies raise capitaland go public.

What's The Score?

Lahti says a robust economy and a plentiful supply of debtcapital have generally made loans easier to get. But what'sreally put the supply of loan funds over the top is the use ofcredit-scoring models.

Credit-scoring represents a paradigm shift in business lending.With traditional credit analysis, businesses are analyzed for theirdebt-paying ability--a time-consuming and expensive process. Infact, the same credit analysis that's used for a $2 millionloan is applied to a $200,000 loan--making the small-business loanapplication process slow and difficult.

But under the credit-scoring model, businesses are analyzed notso much on their ability to repay a loan but on the probabilitythat they'll repay it. In fact, says Lahti, for leases of lessthan $100,000, a leasing company may simply credit-score thebusiness owners' personal credit and check trade and bankreferences to reach a decision.

As a general rule, for leases of more than $100,000 but lessthan $150,000, a leasing company will credit-score a business andits owners and ask for a full set of financial statements. Whenleases surpass $150,000, would-be lessors face the same kind ofscrutiny and analysis they'd face with almost any commerciallender.

So what are the red flags in a credit score that might causeyour lease application to be turned down?

• Personal credit problems. Past delinquencies, slow payments ornonpayments will reduce your overall credit score.

• A high number of credit inquiries. If a lot of lendinginstitutions are scoring your credit, it could be a sign you'vemade too many credit applications and are carrying too muchdebt.

• Lengthy payments on trade credit. If you stretch out paymentsto your vendors to 90 days, your payment history will negativelyaffect your chances of loan approval.

• A high number of NSF bank notices. If you continually writechecks that are returned for insufficient funds, it will undermineyour credit score.

• Lawsuits and judgments. These are never good signs for alender.

• Frequent changes in banking institutions. Lahti says mostlenders like to see at least two years of history with the sameinstitution.

If your credit score comes up low, most leasing companies willtake steps to make the deal doable. "In the trade, we callthis structuring," Lahti says.

Popular structuring strategies include down payments onequipment; additional guarantors; and putting up additionalcollateral in the form of real estate, publicly traded stock,letters of credit and equipment a company already has. "If youalready have equipment on your floor, that's equity," saysLahti. "You can use it as additional collateral. In fact, ifyou need working capital, we can buy your equipment and lease itback to you."

Scoring the Lease

In theory, there is no interest associated with a lease."You write the whole lease payment off, just like any othermonthly expense," Lahti says. With a bank loan, on the otherhand, you write off just the interest portion of the payment andtake an expense for the depreciation of the underlyingequipment.

Still, you may want to gauge the cost of lease financing. To dothis, you must know the residual value of the equipment you'releasing. This is the value of the equipment at the end of the leasethat you would have to pay to purchase it. For instance, supposeyou lease a $12,000 forklift for $300 per month for three years,and at the end of the lease, the forklift's residual value is$4,000. If you then buy the forklift, your total cash outlay wouldbe $14,800 (36 payments of $300, plus $4,000). Because the forkliftcost just $12,000 new, the difference between the original priceand the total cash outlay is the implied financing cost--in thiscase, $2,800.

If you decide to go with a leasing company, such an analysis isa good starting point, but other factors must also be analyzed whencomparing one leasing company to another: namely, the upgradevalue, the flexibility to extend or modify a lease, interim rentpayments, search and documentation fees, and speed of approval.

Let's Make a Deal

Although it's not apparent at first glance, the companyoffering the lease financing is often not the same one that'sselling the equipment. Generally, the equipment seller will referyou to a leasing company with which it does business. Lahti advisesyou to get a quote from the leasing firm the company refers you toand then get another quote to judge the competitiveness of thefirst quote. "Get a second referral from the equipmentseller," says Lahti, "or ask a friend or businessassociate."

If you look for a leasing company on your own, Lahti says, youshould understand whether you're talking to a broker, whosimply structures deals and gets them financed through any of theleasing companies he or she works with, or a leasing company, whichputs its own funds on the line.

There's nothing wrong with using brokers, says Lahti. Thesituation is analogous to using an insurance broker, who finds thebest deal for a client among many insurers and, at least in theory,generates savings in excess of his or her fees. But with brokers,as with many other professionals, the same advice applies: Buyerbeware.

Back at Royal Laundry of Texas, business is booming, thanks inpart to the expanded capacity. According to the Kensis, the currentrun rate is now $2.8 million, an increase of more than 500 percentsince the couple took over the business.

Next Step

Looking for a leasing company? For a referral, contact theUnited Association of Equipment Leasing at 520 Third St., #201,Oakland, CA 94607, (510) 444-9235, http://www.uael.org

Contact Sources

Affiliated Corporate Services Inc., 1550 Waters RidgeDr., Lewisville, TX 75057, (972) 221-7335

Royal Laundry of Texas Inc., 1015 Commercial Blvd. N.,#600, Arlington, TX 76001, (817) 467-9678.