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In Part 1 of this series, I discussed using bank debt to finance purchases. In this installment, let’s examine another financing option, leasing.

Leases come in two basic forms, capital and operating. A capital lease functions very similar to that of a bank loan. Money lent to you to purchase equipment, the equipment is purchased and capitalized by you. This means that the equipment that is on the lease is added to your fixed assets on the balance sheet. You are then able to depreciate the equipment using the same methods as if you bought the equipment outright. Interest is imputed on the lease (typically a higher rate than bank loans) and you are able to write off the interest as an expense.

An operating lease is a form of financing that does not allow capitalization and therefore the lease payments are written off as rental expense on the income statement. With both capital and operating leases, the equipment remains the property of the finance company. Under both kinds of leases, the finance company generally will give you the opportunity to own the equipment at the end of the lease for a specified buyout amount. Unlike bank loans, most leases are non-cancellable, which means that the lease cannot be paid off early for less than the contract or the sum of the remaining lease payments, and there are often prepayment penalties. Additionally, finance companies and manufacturers who lease their own equipment are typically more tolerant of risk and likely to extend more credit to a lab than might a bank.

Choosing the right form of financing is dependent upon the needs and capabilities of the lab and should be carefully compared with alternatives before action. More on this to come.

—Jason A. Meyer, SVP, HPC Puckett & Company

HPC Puckett & Company specializes in mergers and acquisitions of wholesale optical laboratories. Send comments or questions about this article to Jason A. Meyer.