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Lessons for the New Year

January 3, 2012 / admin posted in lending / Comments Off

Happy New Year

One of the things many small businesses think of this time of year is how they can take the lessons learned from the previous year and put them into action in the new year.

 A common complaint I hear is either

1)  wishing they had taken advantage of tax benefits to lower Net Income OR

2) wishing they understood how to work more tax efficiently for themselves without having to ask their CPA all the time.

 When this complaint is lumped in with a need to upgrade some existing equipment or get some new equipment due to growth, then this becomes a very productive conversation.

 Some of the questions that I get to ask include

1) Are you paying too much in federal taxes for 2011? Did you make money this year?

2) Do you prefer to capitalize or expense your equipment?

3) How long do you intend to use this equipment?

4) Do you want to own it at the end? Do you care?

5) Is this type of equipment subject to obsolescence?  Will there be newer better models out there in 3-7 years?

All of these things are factors into how to both structure a lease that is workable for the client, tax efficient, and most importantly helps them in their business.

Leasing is a much more flexible form of financing than many people are aware of so this will hopefully get the ball rolling to see how it can help your business

Stu Lustman

Southern Lending Solutions

What Is An Equipment Lease Line?

July 12, 2011 / admin posted in lending / Comments Off

Lately, we’ve been getting a lot of requests for lease lines so I thought they warranted some discussion on the blog.

What They Are

A lease line, or an equipment lease line of credit is not unlike other lines of credit you are familiar with in that the Client takes down a piece of equipment and draws from the line as they need it.  Unlike Operating lines or Home Equity lines, they are NOT revolving though so once the line is used the Client has to reapply and get reapproved to add to the line.

What Clients Like About Them

Flexibility: Client only uses the line as they need it, plus if they apply early enough, they can use the line to pay advances/deposits to their vendors.

Vendor Agnostic: Many clients after being in business for a couple years have some established vendors that like working with and who they trust to get them the equipment they need.  Great cause a lease line can incorporate those vendors as well as others the Client may or may not have worked with before.

Multi-Equipment Types funded: This is a biggie as the trend in Equipment Leasing is to go strictly to a vendor finance program and get the financing from the vendor.  This is less successful in the multi equipment area as most Clients don’t want 3 separate leases for phone systems, IT and other tech equipment when 1 lease for all will do the job.

Custom Structures: Need to expense this equipment? Depreciate It?  Either way custom structures for maximum tax efficiency can be easily created with a lease line whereas most vendor programs are strictly 36-60 months with a $1 buyout at the end qualifying as a Capital Lease only

Rates and Payments Known Well In Advance: There’s a high level of predictability with a lease line as a rate and payment factor are approved in advance so for each new piece of equipment added, the Client knows exactly how much their payment will increase. This helps create predictable cash flows and cash flow projections.  CFOs and Controllers love this.

Equipment lease lines are not a good fit for every business as the Client has to get appproved for the entire amount upfront but its a good fit for lots of situations.

Stu Lustman

Southern Lending Solutions

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

Securities Lending VS. Traditional Banking

February 5, 2011 / admin posted in lending / Comments Off

I get asked on a regular basis where our funding comes from. No matter how many times I explain that our money comes from a Global Hedge Fund people insist on asking if its from a bank. I thought I would dedicate this post to that very topic.The one thing that has continued to stall the economy is the same thing that continues to make this program of lending against securities prosper. The banks just don’t want to part with their money!  That’s a generalized statement, and of course the banks do still lend money…..to the Rockefeller family.

For many businesses, turning  to a bank is just not an option.  Securities lending in today’s economy means that publicly traded companies can take on a non-recourse loan and have the collateral that sits otherwise dormant in their coffers put to good use. Since the securities themselves are the collateral, it puts a business in a very good position to continue and run their day to day operations without having to liquidate their remaining cash holds to complete this type of loan.  One upside to this program that I have spoken of very little in the past, is that it allows the company owner or share holder to receive their securities back in the same if not better condition than when they originally pledged the shares. A responsible lender will make good use of those securities by making thoughtful and intelligent trades causing the stock to appreciate over the loan repayment period. As the banks continue to lend money to only the wealthiest and an air of uncertainty continues to plague the financial landscape, other forms of lending will continue to be needed. I believe for this very reason that regardless of how the banking industry fairs securities lending will be here to stay for quite some time.

Todd Rome
Southern Lending Solutions

Return of Shares Process Part 1

September 7, 2010 / admin posted in lending / Comments Off

The bulk of our loans are non-recourse and our anecdotal evidence tells us at least 75% of these deals end up in default (usually an elective default by the client as in ‘my shares have dropped by X% so I’m going to elect to take the money I’ve gotten and not pay you back’).

If this is true then how are the shares managed when it is being treated like a loan and our clients want the shares back?

After the initial selling of some of the position upon closing, the lender typically holds some of the stock in inventory.  Active share management takes place at the 6 month mark. At this point, the client has made 2 quarterly payments on time and the lender treats it as a loan from here instead of a multi step, multi year exit strategy out of the stock.

The active buying and selling of shares takes place here and in essence the lender becomes a market maker in the stock.  This means our lender is holding some in inventory at all times as well helping to provide liquidity for the stock by filling some of the buy and sell orders.  In fact, there are often cases where the lender will actually hold more than 100% of the funded amount in their inventory meaning they have bought not only enough to provide shares to return but additional shares as well.

Stu Lustman
Southern Lending Solutions

Recourse or Non Recourse Loan in Securities Lending

August 27, 2010 / admin posted in lending, Uncategorized / Comments Off

A question we often get in securities lending is about recourse versus non-recourse loans. Specifically, the question is why would we get a recourse loan if we can get a non-recourse loan. Non-recourse means if the loan goes into default the client can just walk away and only surrender their shares.  Great, right?

Not necessarily.

For many clients, the non-recourse loan is the right choice especially if they are unsure of the company’s prospects for the future, need the cash for their business desperately or are using this as part of a multi step exit strategy out of the stock.

Since those 3 describe many of our clients, then who would recourse be good for?

1) Controlling interest- When a client has a controlling interest and anything that can be examined or construed as a sale of shares taking them below 50% ownership and thus losing that control

2) High Capital Gains Tax Jurisdictions- the verdict is still out on the taxability at the introduction of a securities loan. In a non-recourse loan the securities are only physically transferred away but all other aspects of ownership remain in tact.  See where your country falls on this list here.

If these 2 things are important, then recourse if available if the best choice. Next post will describe some of the differences in more detail.

Stu

Southern Lending Solutions

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