Leasing Case Studies

These case studies are reported by the Equipment Leasing Association.

Introduction:

Why do companies lease equipment? Companies lease for a variety of reasons: leasing offers a valuable financing package that allows companies to maximize their purchasing power; leasing is often the least expensive financing method when all the benefits are factored in; and, leasing equipment transfers the risk of technological obsolesce from the lessee to the lessor.

Every company must consider different options for procuring equipment based on their business model and business environment. Below are case studies designed to illustrate how companies used equipment leasing as a strategic means to fulfilling a business need.

The customer
Minneapolis-based Best Buy Co.,Inc. (NYSE: BBY) is the nation's number one specialty retailer of consumer electronics, personal computers, entertainment software and appliances. The Enterprise operates retail stores and commercial web sites under the names: Best Buy (BestBuy.com), Magnolia Hi-Fi, Media Play (MediaPlay.com), On Cue (OnCue.com), Sam Goody (SamGoody.com) and Suncoast (Suncoast.com). The company reaches consumers through more than 1,800 retail stores nationwide, in Puerto Rico and in the U.S. Virgin Islands.

Best Buy's situation
Best Buy is continually acquiring and refreshing the server farms and networking hardware needed to power its over 400 stores and on-line retail outlet, BestBuy.com. The Company requires approximately 750 servers to support the customer service, inventory, distribution and logistics activities of both its brick-and-mortar and on-line venues and has been using HP's industry standard ProLiant servers since 1998.

The solution
Best Buy looks for a complete leasing solution. For customers like Best Buy, leasing both HP and non-HP equipment, as well as financing software and services, provides a one-stop shopping experience.

Voice of the customer
According to Dave Kaercher, Director of Technical Design and Build, Best Buy chooses to lease for three primary reasons.

First, the Company follows an Economic Value Add (EVA) model - a financial measure that determines whether an investment will return more than the cost of capital, and if it will do so over time. For Best Buy, as with many companies, the EVA process usually points to leasing as the preferred method for equipment acquisition because it enables them to capitalize their costs over the life of the project.

Secondly, leasing enables the Company to refresh its equipment easily as necessary. "At the end of the lease term, which is usually three years," says Kaercher, "we can decide whether to purchase the equipment, extend the lease, or refresh it for more current technology."

The third reason is a broader business issue - the ability to re-evaluate their IT strategy on a periodic basis. "Leasing forces us to look at our hardware and infrastructure on a regular basis to ensure we have the right capabilities in place."

While these are the driving forces behind the Company's choice to lease equipment rather than buy it, leasing provides other benefits as well. "Leasing has helped us grow our business without laying out funds up front to purchase. It gives us the ability to ramp up our business without incurring a tremendous amount of costs."

Another benefit, according to Kaercher, is better inventory management of the Company's hardware. "Best Buy has grown so fast that we don't have all of the back office capabilities in place to track our assets. [Leasing] provides us with excellent tracking of our inventory, which enables us to better manage these assets."

Despite economic models and profitability measures, part of the decision to lease is based on something a little more human - relationships. "Our local representation is excellent," says Kaercher. "[They're] willing to customize and cater solutions to meet our needs. [They] come through with the right answers at the right time."

Company Background:
Cherokee Carpet Industries of Dalton, Georgia is a manufacturer of residential and commercial carpeting. With 315 employees, Cherokee Carpet Industries boasts $50 million a year in revenues. In its five years in business, Cherokee Carpet has grown rapidly. 1999 was the first year that Cherokee Carpet will have audited financial statements.

As a closely held and highly leveraged S-corporation, to grow its company, Cherokee was looking for strategic financing methods that would position the company for the next level. Since its inception, Cherokee has leveraged the benefits of leasing as a strategy to grow the company. At present, the company leases $150,000 annually in equipment.

What was the Need?
Rapid growth in its five years in business continues to present a need for Cherokee Carpet to minimize its capital requirements. Cherokee Carpet Industries had a need for a Plantex 36 End Extruder for polypropylene and nylon carpet yarns, an industrial piece of equipment. Cherokee Carpet considered a straight purchase of $3.5 million for the piece of equipment, but discovered that leasing afforded them the opportunity to leverage their financial resources. When the company weighed the opportunity costs of a straight out purchase against the lease payments, leasing offered a better solution.

Cherokee recognized equipment leasing would provide tax benefits as well as preserve operating capital. The primary reason Cherokee Carpet chose to lease versus purchase the industrial piece of equipment was because as the company was rapidly expanding, leasing offered Cherokee Carpet the ability to maximize cash flow. Therefore Cherokee Carpet had more capital available for the operation of the company and for business growth investments.

What were the Terms of the Lease:
The lease was structured to help Cherokee Carpet Industries minimize its capital requirements. The lease was negotiated to the terms of a seven year capital lease with an early buy out (EBO) option at three and five years and limits on fair market value.

Results:
Leasing equipment as a financing option afforded Cherokee Carpets the ability to leverage their capital, increase cash flow and maintain more funds for business expenditures. A customized program was structured and used to meet Cherokee Carpet's financial and equipment needs.

Company Background:
East Texas Copy Systems (ETCS) of Tyler, Texas is an authorized Canon Dealer of digital networked office equipment. With 15 employees, ETCS services large quantity accounts, such as hospitals, school districts, city and county governments and major industries.

One of ETCS' largest customers, a non-profit health system, was looking to take advantage of leasing equipment as a means to minimize cash outlay and acquire 400 copiers and facsimile machines, as well as to structure a deal that would satisfy the health systems' billing needs. At present, ETCS leases $500,000 annually in equipment to this customer.

What was the Need?
ETCS recognized that having the hospital lease copiers would offer more flexible leasing terms, reduce its costs in procuring the equipment and enable the company to pay for the equipment as it is being used. Thus, lending to the efficiency and productivity of the business.

ETCS needed a flexible, all-cost included leasing program in order to meet its customer's requirements. When considering financing options, the health system also looked at acquiring the copiers using a bank line of credit; however, leasing the equipment proved to be a more flexible and process efficient solution.

What were the Terms of the Lease:
The challenge of meeting the customer's billing needs was to integrate an aggregate cost-per-copy billing cycle with individual cost center reporting. The lease was structured to meet the billing needs defined by the health system. Each copier was billed with individual reporting to its own cost center. Aggregate pricing was based on lease volume within a 60-day period; thus, lowering the lease price as the hospital continued to order copiers.

Leasing's flexible invoicing accommodated the hospital's payment terms, thus avoiding administrative delinquency, which had been a problem with the hospital's previous financing source.

Results:
The flexible lease that ETCS developed afforded the hospital the ability to lease six to 10 copiers per month; thus, reducing monthly capital outlay while affording the hospital the equipment needed to supply their growing demand for copiers. This arrangement allowed ETCS to win the hospital's business and steadily increase its volume leased based on equipment demand.

Leasing their copiers afforded the health system the ability to both leverage their capital, in addition to, protecting themselves from technical obsolescence.

Customer Quote:
"[They] structured the billing cycle to the individual cost centers, making it more convenient for the hospital's different invoicing needs," said Greg Walker, ETCS President. "Not all financing sources would be as flexible or accommodating. In this industry there are several, national faceless equipment dealers and leasing companies who have the "me too" attitude. [They] really proved to be extremely customer service- oriented, just as we like to be at ETCS."