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An Example of Use v Ownership

May 16, 2011 / admin posted in finance, lending / Comments Off

To continue the argument of Use v Ownership and why Leasing benefits the small business owner, I have gotten down to some raw numbers based on our last week’s example. We have a 50k piece of equipment financed through a loan v leased for 36 months. The other assumptions are use of MACRS accelerated depreciation and a sales tax of 7%. This tells the story better than I can but please feel free to email me @ Stu@southernlendingsolutions.com with any questions or for the more detailed chart outlining this study.

Stu Lustman

Southern Lending Solutions

Loan Lease
Equipment Value 50000 50000
Down Payment 5000 3000
Sales Tax 7% 3150 0
Amt Financed 48150 47000
Rate 8% 11%
Monthly Payment 1629 1665
Depreciation 3 Yrs 35500 0
Using MACRS
Tax Deductibility 35500 59940 

 

The Basis of Equipment Leasing: Use v Ownership

May 9, 2011 / admin posted in finance, lending / Comments Off

I often get asked ‘Why should I lease equipment that I need in the course of my business’?

Here is an example I often use to explain to people why:

Imagine yourself as a business owner that makes and sells widgets. This year the big widget making machine is the Widget Pro 1000 and it costs $50,000. You need this machine (or one like it) to make the widgets that you will then sell. You have 2 options:

A) You buy the equipment either with your own cash or through a loan with a bank
B) You lease the equipment instead over 3 years with a 10% Purchase Option at the end of the period

Each has advantages and disadvantages. With Option A, the overall cost is less over that same 3 year period and you get to depreciate the 50k cost over 5 yrs with one of the 3 depreciation methods previously discussed. Those are the advantages.

With Option B, you are paying a little more than a loan and thats the big disadvantage. The advantages? One advantage is every dollar of every lease payment is tax deductible, so we are not limited to the 50k purchase price. Let’s see the biggest advantage though:

2 Years From Now, the Widget Pro 2000 comes out and provides 15% more output for the same cost or saves 15% for the same level of production, a significant technological upgrade. What can we do about it?

Human nature dictates that when we pay for something and own it, we want to get maximum use out of it so since there is likely 5-6 years use in the WP 1000, it means we are likely to keep it another 3 yrs even though we know better is out there? Why? Because we feel like we are throwing our $$ away if we don’t. The biggest hidden disadvantage of ownership is right here, feeling like we are locked into outdated, obsolete equipment because we bought it. If you think you would make the smarter business choice of the immediate upgrade, then think about how many break/fix computer guys there are to help extend the life of computers and you know its just not true.

With a lease, we are locked into one more yr, use the purchase option to RETURN the equipment that is now outdated, and upgrade to the WP 2000 right away so we can increase output, lower our costs, or both.

So which way is really cheaper in the end?

Stu Lustman

Southern Lending Solutions

What Determines Equipment Lease Rates?

May 5, 2011 / admin posted in finance, lending / Comments Off

Lease rates are often determined by two things that most people are not aware of. Those two things are 3 and 5 Year Treasury Rates and 3 and 5 Year Treasury Interest Rate Swaps.

3 and 5 year Treasuries are something many people are aware of. They are bonds issued by the Federal Government with a 3 or 5 year period until maturity, when the repayment of principal occurs. Interest payments are made in the interim on a quarterly or annual basis. They are the basis for some lease rates because the average lease period is 3-5 years.

Interest Rate Swaps
An Interest Rate Swap is An exchange of interest payments on a specific principal amount. This is a counterparty agreement, and so can be standardized to the requirements of the parties involved.  Counterparty agreements within finance usually mean the 2 parties holding the agreements are financial firms, professional firms or even law firms or other legal entities like an offshore investment fund.

An interest rate swap usually involves just two parties, but occasionally involves more. Often, an interest rate swap involves exchanging a fixed amount per payment period for a payment that is not fixed (the floating side of the swap would usually be linked to another interest rate, often the LIBOR, London’s version of The Prime Rate). In an interest rate swap, the principal amount is never exchanged, it is just a notional principal amount so it is just used to determine the amount and terms of payment streams being swapped. Also, on a payment date, it is normally the case that only the difference between the two payment amounts is turned over to the party that is entitled to it, as opposed to exchanging the full interest amounts. Thus, an interest rate swap usually involves very little cash outlay.  Current rates are 1.00% for 3 Year and 1.95% for 5 Year Treasuries.

Why do firms engage in swaps? Primarily to either match payments with their expenses at that given time OR because they believe it reduces some of their portfolio risk in their loan and lease portfolios.

The next factor is the risk related to that specific deal.  A lower risk transaction might only be priced at 50 or 100 basis points (0.50% or 1.00%) ABOVE the current Treasury rates.  Higher risk transactions will be priced higher of course like 200 or 300 basis points above Treasury rates.

So to get an idea of how rates are going in the marketplace, its wise to check on the trend in Treasuries Rates to get an idea of what you could be paying, although equipment types, terms and leasing structure will affect the overall lease payment as well.

Stu Lustman

Southern Lending Solutions

 

The Role Of The Chinese Intermediary

February 20, 2011 / admin posted in finance, lending / Comments Off

Any one who has conducted business in the Asian marketplace has inevitably run up again the role of the Chinese intermediary. Since the Chinese never conduct business face to face with people they don’t know, it is customary for them to use a go between.  This may be an individual or company responsible for making introductions or to spearhead the entire project. Since it takes a considerable amount of time and is often mired in bureaucracy, one should be prepared to pull up a chair.

I have communicated with many individuals regarding this very topic so I have become somewhat of an expert. Many Chinese businesses have relocated to more open and transparent markets such as  Hong Kong, Singapore, and the US, in an attempt to take take advantage of liberal business standards. That being said, the role of the intermediary is still as important as ever. As in any business transaction the more outside entities involved, the more likely hood of important facts to be lost in translation. Crucial details to a deal can be distorted by the time it’s  communicated through the various parties.  This is simply one more obstacle in a chain of obstacles that can discourage international business. As the older members of these Chinese companies hand the reigns down to the newer generation of leaders, the Chinese intermediary will become less of a dominant figure. Until than, anyone wishing to conduct business in the Asian market place should be prepared to face off with this custom.

Todd Rome
Southern Lending Solutions

The Significance of the Capital Gains Tax in Securities Lending

February 8, 2011 / admin posted in finance, lending / Comments Off

The capital gains tax refers to a tax on on any gains received on the sale of stock or other asset.  Many countries have a capital gains tax but there has been a recent move to abolish this practice in the last decade. The US and many European countries recognize the capital gains tax.

How does this tax affect securities lending?
In countries where the capital gains tax exceeds 10%, it can make the terms offered by a lender much less attractive.  Of course the needs and desires to complete a stock loan will mitigate the effect this has on a particular deal. In other words, should a business or individual have a true need for financing, then securities lending is still one of the fastest ways to receive that funding.

Which countries have a significant capital gains tax?
* The US and India have some of the more steeper tax gains on record. Some Asian countries such as Singapore have none what so ever. Others have a variation such as a stamp tax which is assessed at the sale of a stock. One thing to take note of when considering the capital gains tax is when and how it’s triggered. Some countries will charge capital gains regardless if there is a sale or not. Specifically, the pledging or delivering of shares in some countries will by default trigger this taxable event, even though no sale has taken place.  For this very reason securities lending makes much more sense in some countries than it does in others

*Please note-I am not a tax adviser and as such the above is subject to interpretation. Always seek advice from a tax specialist should you have specific questions regarding the capital gains tax*

Todd Rome
Southern Lending Solutions

The Importance of Custodian Banks

January 4, 2011 / admin posted in finance / Comments Off

In Securities Lending, Custodian banks play a very important role. They look out for the client’s shares in case something illegal or undesirable (like a bankruptcy) happens to the lender or other counter party in the deal.  Here’s a great definition of custodian bank , thanks to Wikipedia.   The safeguarding of assets and the management of the settlement of the shares vs. cash are the primary roles of the Custodian and it’s for this reason we only use large global banks for this like EFG Private Bank, Credit Suisse, Citi or HSBC.

Many clients ask us about the safety of their shares given the fraud in the marketplace and the fact that many of our lenders are private companies and it’s this safeguarding done through the Custodian Bank that helps to put their minds at ease so they can move ahead and get funded.

Stu Lustman
Southern Lending Solutions

Asian Stock Exchanges Lead The Way

September 12, 2010 / admin posted in finance / Comments Off

At one time many of the stock exchanges in Asia including:  Hong Kong, Taiwan, and Singapore were once seen as emerging markets and to a degree, they still may be today. This has changed over the years as many US and Canadian businesses have set up shop in these up and coming countries.  The Singapore and Hong Kong Exchanges have become more transparent, offer longer trading hours, and provide more flexibility with clearing and settlement. Many international brokerages and banks such as Goldman Sachs and Credit Suisse see these countries as growing players in the securities market and have focused much of their attention to supporting that growth.

Todd Rome
Southern Lending Solutions

The Recourse Loan in Securities Lending

August 30, 2010 / admin posted in finance / Comments Off

So in our last post, we started the discussion of Recourse vs Non-Recourse lending within the framework of a Securities Lending program. To review or if you missed it, check it out here.

Why would someone take recourse and more responsibility over the repayment of a loan when they don’t have to?

1) Ownership/Title:  Some control positions (when an insider owns a controlling stake in the company) are reliant upon ownership not changing so they continue to own their 51% of the firm instead of the transfer dropping their stake to 49% or 47%. In a recourse loan, the ownership does not change and the shares are physically moved to a bank/brokerage or other account staying in the client’s name.  Many clients don’t care because their firms need the cash but control positions do so that’s how we accommodate them.

Unlike in a non-recourse loan where lenders freely trade in and out of the stock and often become something like a market maker in the stock, in a recourse loan they don’t freely trade the shares.

So how does a lender make money without trading the shares? Since interest rates are typically very low, its not on the payment stream. The one way a lender makes money in a recourse loan that they don’t in a non-recourse loan is that they might actually lend the stock out to another institution for the purposes of hedging or to cover options expiration’s or cover an existing risk in their own trading account.  This is a big difference between recourse and non-recourse and many firms are OK with this and some are not.

Stu

Southern Lending Solutions

Introductions

April 6, 2010 / admin posted in finance, lending / Comments Off
My name is Todd Rome and I bring many years of experience from the finance industry to this blog. I hope over the next few months, many readers of this blog will gain insight to new financing instruments and trends available to them.

Todd Rome