February '20

For the Business of Apparel Decorating

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5 6 P R I N T W E A R F E B R U A R Y 2 0 2 0 Grow Your Business with Assistance A new year is a catalyst for growth, expansion, and new ventures. Some shops have just opened their brick-and-mortar busi- nesses, while others are looking to expand into another decoration territory. With new budgets and a fresh outlook on goals, it may be time to invest and increase your shop's production with a new piece of garment decoration equipment. Making such a big purchase shouldn't go without planning and preparing the best way a business can, which is why folks at Ascen- tium Capital, CIT, and Geneva Capital are here to breakdown financing versus leasing and give application advice. FINANCING VS. LEASING Before jumping in and committing to new equipment, it's essential to understand the basics. Depending on a shop's financial state, financing might make more sense than leasing and vice versa. Let's have a look at why that might be true. Ascentium Capital's finance manager, Michael Jung, says, in most cases, an equip- ment finance agreement (EFA) is free of any residual payments, which means the last dis- bursement of money is the final one. The ca- veat—payments during the term are higher for the customer. Conversely, a lease term can come with a "10–20% end of term buy- out to own the equipment but comes with a lower monthly payment," explains Jung. However, the customer can decide they do not want the equipment. Therefore, they do not have to pay the buyout. Because leasing offers a lower monthly payment and the opportunity to upgrade to newer technology once the term ends, it's a popular option for shops that leaves customers with a bit more flexibility, ac- cording to Carey Kroll, account manager at Geneva Capital. Another point to consider is the differ- ence in tax breaks. "A cash purchase, tra- ditional loan, and $1 PO lease all allow the customer to either write off the en- tire equipment cost in the year it is pur- chased—if they have the income to offset the purchase—or depreciate the equip- ment cost," says Kroll. In a true leasing agreement, all monthly payments are tax- deductible without income clauses. Finally, one of the more critical and ap- parent differences between financing and leasing is ownership. According to Greg Bourdon, VP of small business solutions at CIT, in financing equipment, the cus- tomer technically owns the asset from the point of transaction. He adds that the cus- tomer has the "option to buy out their fi- nance contract early at a discount." With a lease, the lessor (the party leasing the equipment) owns the asset. DECISIONS, DECISIONS After comparing the two options, it's time to carefully look at each, and determine what's best for your situation and how it will affect your business before you head into the application process. Jung tells businesses to identify what truly matters to them. He poses, "Do they want lower monthly payments or do they want to avoid an end of term buyout? Do they want to own equipment from the be- ginning of the term, or do they want to avoid liability?" Moreover, often, income and cash flow are the two significant factors in decid- ing which route to go, says Kroll. While Bourdon argues that the major factor in determining one over the other is whether the customer expects to keep or replace the equipment once the period ends. He explains, "If the apparel decorator expects to keep the equipment, the best option is probably financing. If they expect to replace it, a lease with fair market value would be the best option, although they also have the opportunity to change their mind and buy the equipment at the end of the lease period." These, along with other important points, need to be addressed. Jung touches on the tax benefits of financ- ing and leasing, adding that "The IRS will allow a business to write off up to $1.02 million from their business taxes for any new equipment acquired during the tax year (as of 2019) regardless if that equip- ment is leased or financed." Another advantage of lease payments, ac- cording to Kroll, is that they're "off the bal- ance," which means payments are only part of company financials as a rental expense. From tax breaks to cash flow and up- grades, businesses need to consider it all when deciding between the two. GETTING APPROVED Whether applying for financing or leasing, the credit application and underwriting process are identical. For most applica- tions, the hopeful lessee submits a one or two-page form along with backdated bank statements. To speed up the process of application, Jung tells business owners to apply for at least 51% ownership to get approval. "For more challenged credit, we may require 100% ownership listed on their applica- tion." He adds that an invoice needs to be submitted with an application so the lender can verify the equipment and sup- plier or vendor. FINANCING VS. LEASING A L E X A N D R I A B R U C E

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