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Rapidly Advancing Technology Makes a Strong Case for Telecom Leasing.

"Buy now, pay later." It's as much a part of the American "instant-gratification" mentality as drive-through hamburger joints. It worked for awhile, and still does in many industries, but there's something standing in the way. It's called high technology and it's quickly becoming the catalyst for growth and competition across the nation.

Take the telecommunications industry, for instance. The equipment is advancing constantly; the purchase and installation costs are high. So by the time the equipment is paid for, there's a good chance it's obsolete. Now "buy now, pay later" doesn't seem so great, does it? Lower Payments While Leasing

How about "make lower payments now, buy later if you want to"? In a sense, that's what leasing is all about.

Leasing has always made sense for businesses that need use of equipment without the risk of ownership, and it is now represents the most important source of financing for the acquisition of capital equipment by American businesses. But besides shifting the risk of obsolescence to the lessor, leasing has some additional economic advantages over other alternatives, all of which you should evaluate before making a decision for the financing of your telecommunications equipment.

If you're a financial or technical manager and are involved in the purchasing decisions for telecommunications equipment, you are looking at four basic options: pay cash, finance through a loan, rent or lease.

Putting out year cash all at one time, unless you have an extremely low cost of funds or no other business areas that provide a better return on employed capital (such as inventory or revenue-producing equipment), simply doesn't make sense in today's economy. In most cases, neither does renting, because you might not have an option to buy at the end of the term, you may incur rent increases and you probably won't receive the value of the tax benefits. The fact is, rental is okay for less than 12 months, but longer gets risky and expensive. Takes Close Evaluation of Needs

that leaves loan financing and leasing, both of which require a close evaluation of your particular needs. First, if you are manager of technical operations, most likely you live in a budget environment. So what you're looking for in any purchase is low monthly payments. If you finance the equipment through a loan, you'll own the equipment up front, but you'll pay prime plus two to three percent to do so. So from a comparative standpoint, that gets expensive after a budget history of lower rental payments or even lower leasing payments.

Before you lock yourself in, determine whether you'll be able to use or benefit from the investment tax credits and accelerated depreciation that come with ownership in the current fiscal period. If not, the leasing company that uses the tax benefits in the current fiscal period can offer yo a tax-oriented lease and reflect the value of those benefits in the form of reduced monthly payments. In most cases, these payments are fixed for the full term and are lower than available rental programs. In addition, you can still receive tax deductions for the full amount of the monthly lease rental payments. Look At Tax Benefits

Of course, if you're the financial manager, you may not be so concerned with low monthly payments. But you are concerned with tax benefits and balance-sheet cosmetics. Here, too, leasing has an important advantage. When you finance through a loan, you've increased your long-term assets, but you've also increased your long-term and short-term liabilities. This does not enhance the balance sheet. If you can't use the tax benefits in the current fiscal period or you have a low effective tax rate, wouldn't it be attractive to gain the full value of those benefits in the form of a reduction in your monthly payments?

Such is the case with leasing. Tax-oriented leases can be structured so they're off the balance sheet and the payments are recorded only on the profit-and-loss staement. These leases are known as operating leases and, at the end of the lease term, provide the lessee with options to purchase the equipment at fair market value, renew at a fair market value rental or return it to the lessor. Lessor Handles Progress Payments

In the telecommunications industry, leasing can have yet another advantage: the financing of progress payments required by a manufacturer. A typical installation cycle including wiring and testing can take anywhere from two to 12 months, depending on complexity. While most manufacturers require progress payments even though the system isn't in use, in leasing, the lessor can make the progress payments. The cost for doing so is then included in the monthly lease payments. What to Look for in a Leasing Arrangement

While many of the advantages mentioned are commonplace, one of the most overlooked factors is finding a leasing company that offers the greatest amount of flexibility so that the package is customized to the specific needs of your business.

Obviously, you're looking for competitive rates, but in addition to the financial rate, select a leasing package on the basis of service. Ask the following questions:

* How much experience does the leasing company have with the kind of equipment you want to lease?

* Will the leasing company handle your transaction as an investment for themselves, or will they act as a broker and sell your transaction to another financial institution?

* Can the leasing company customize the payment type to meet the needs of your business?

* Does the lease provide flexibility so you can move equipment from one location to another?

* Does the least provide for future additions or upgrades that can be included in the monthly payments?

* Does the lease provide for future equipment purchases regardless of geographic location and/or time with a minimal amount of documentation? Examples of How It Works

These are areas which General Electric Credit Corporation deems critical. GECC has been in the financing business for 50 years and has leased approximately $300 million of telecommunications equipment to more than 1,000 clients.

As an example, one of our largest accounts is a major financial services institution with offices nationwide. By tailoring a package specifically for this institution, GECC now provides them with an annual credit line to lease all types of telecommunications equipment in more than 60 locations. And all of their business is on a master lease, which allows them--or any other customer--to negotiate only one contract, even for additional equipment that may be purchased. This means that multiple purchases in a variety of locations are handled with minimal documentation.

In the case of another major client, lease payments were structured at different levels: lower-than-normal payments for the first half of the term, increased payments for the second half and all payments made on a quarterly basis rather than monthly. This particular arrangement was designed to meete the cashflow requirements of this customer. Have Clear Knowledge of the Options

The important thing when arranging for telecommunications equipment financing is to have a clear understanding of what leasing can and cannot do, and a clear knowledge of the options leasing makes available to you. In order to help you evaluate these options, many leasing companies like GECC will provide alternative lease structures supported by a computerized economic analysis. The latter involves plugging in your economic variables to demonstrate which alternative is more effective for your situation. Many Packages to Suit Needs

When it comes right down to it, there are probably dozens of leases and financial packages that will provide you with the equipment you need today. The best one will be the one in which the leasing company is flexible to your needs and eager to offer financial consultation to help you save money.
COPYRIGHT 1984 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1984 Gale, Cengage Learning. All rights reserved.

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Author:Rowack, R.
Publication:Communications News
Date:Jul 1, 1984
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