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2015

Leasing options can help you to reserve your working capital, manage your credit, and still invest in the equipment your small business needs to pursue its growth targets. Tracking industry trends for 2015 can help you make the right leasing decisions for your company. In addition, you’ll want to learn more about planned changes to accounting rules that will alter the way equipment lease expenditures are reported. These 2015 industry trends and changes in accounting rules can help you assess your company’s equipment leasing options

 


1.   Introduction

As a small business owner, you can’t afford to have cash management concerns distract you from your company’s core areas of focus. At the same time, you need to conserve your working capital and make the most strategic use of your lines of credit as you pursue new opportunities in areas such as marketing, R&D, and expansion. And to complicate matters further, you need to invest in equipment to keep your company competitive and positioned for growth. Depending on your needs and objectives, leasing may make sense for your company when the time comes to acquire new equipment.


According to the Equipment Leasing and Financing Association (ELFA), that time may be now. The organization predicts that 2015 will see record spending of “nearly $1.5 trillion in capital goods or fixed business investment (including software).” That figure accounts for spending by U.S. businesses, nonprofits, and government agencies. On the business side, the hike in spending is seen as a sign of economic confidence and expectations of expansion, as companies in some industries see capacity utilization rates “reach or surpass levels historically known to spur business investment.”

 


2.   Taking stock of the industry trends

ELFA predicts a “healthy growth rate of 6 percent” in equipment and software investment this year. It adds that “aircraft, trucks, and other industrial equipment are projected to be among the higher growth types, while agriculture, computers, and software are expected to see slower growth.”


With the Federal Reserve expected to raise short-term interest rates in 2015, the organization predicts that businesses will “seek to lock in equipment financing at lower rates.” In fact, it has forecast a trend toward the use of financing for 62 percent of businesses’ $922 billion in expenditures on plant, equipment, and software this year.


Technological advances are supporting the move toward increased financing. “Equipment finance providers are streamlining their business processes and improving customer self-service capabilities using digital technologies,” ELFA finds. “To meet customer demand and address evolving technology equipment requirements, equipment finance companies will tailor innovative financial offerings.”

 


3.   Taking reporting rule changes into account

In addition to tracking these 2015 trends, ELFA has its eye on an upcoming change in accounting rules that will have an impact on the way businesses account for equipment leases. Lease consultant Bill Bosco of Leasing 101, a member of the ELFA accounting committee, was sponsored by the organization as a working member of the Financial Accounting Standards Board (FASB) task force to change the accounting rules. He explains that the Lease Accounting Project was initiated by FASB, which establishes accounting rules in the U.S., at the direction of the Securities and Exchange Commission.


“The project’s major objective is to record operating leases as an asset and a liability on the balance sheet of any company that has to report audited financial statements,” Bosco says. “So it’s going to apply to small- and medium-sized enterprises that have to put out audited financial statements for their banks. The objective is to show readers of financial statements what the liability was for operating leases as well as what the value of the right to use the asset is that arises from those operating leases.”


The project began in 2006, and to understand its evolution, it’s helpful to have some background on where accounting rules and practices stood at that starting point. “Operating leases are currently off balance sheet, and what that means is that neither an asset nor a liability appears on the books, but a company reports rent expense,” Bosco explains. “They accrue the average rent, and they pay the actual rent for any equipment that they’re leasing or any office space or retail store space.”


Under that practice, financial statements record only rent expense, and companies footnote future rent obligations, he adds. “That’s so people like lenders can understand what your company is obligated for that might not be on the balance sheet when they’re making a decision as to

whether or not to lend you money.” The SEC decided that it was better practice to include that information on the balance sheet, and that decision led to FASB’s creation of the Lease Accounting Project.

 


4.   Scaling the changes to small business capacity

The details of the initial proposed change sparked concern among small business owners and leasing industry professionals. “People were worried about the complexity of this,” Bosco says.


“A small business doesn’t have a big accounting staff.” But the project has evolved through many iterations and much public comment since its inception, and based on industry input and public comment, FASB opted for a rule that puts the present value of rents on the balance sheet as an asset and a liability but does not call the liability debt.


“That’s an important point. They made it easier to comply because of the way they decided to handle the P&L and the balance sheet,” Bosco says. “The P&L is going to stay exactly the same. A small- or medium-sized company, or any company for that matter, would for operating leases approve the average rent expense if it’s an uneven rent lease, and pay the actual rent expense, same as you do today—so you don’t have to change your rent payment process or your rent cost accounting process.”


Another area of concern was that the new rule would have a negative impact on small companies’ credit ratings, but that fear is unfounded, Bosco says. “Your credit is not going to change at all, because lenders and credit rating agencies always look at operating leases in the footnotes. Just because FASB says you’ve got a new asset and liability doesn’t change your ability to pay your debts, so your credit rating isn’t going to change.”

 


5.   Getting a handle on it all—and preparing for compliance

What does the impending change mean, in practical terms, to you as a small business owner? When the new rules go into effect, you’ll “put the present value of the lease on the books each month with the new present value and reverse the old present value,” he says. “You can actually do it on an Excel spreadsheet. All you’ve got to do is put at the head of the column a present value calculation using your incremental borrowing rate, which is the rate that you’d pay on a loan of the same term as the lease. Put that at the top of the column, do a PV calculation, and make an entry debiting right-of-use asset and crediting other lease liability. It’s that simple.”


In its latest iteration, which is supposed to be signed toward the end of this year, the rule “will give users of financial statements better information, but it will not penalize companies that are leasing equipment as the original project would have,” Bosco says. He notes that the FASB made a great effort to simplify the accounting changes prompted by the new rule and to make compliance less costly.


It’s also important to remember that the new rule will not go into effect for companies until 2018, so you’ll have time to prepare for the change. But by educating yourself about the new rules now, you’ll be better equipped to understand the full impact of your equipment leasing decisions. And that, in turn, will help you to devise your most productive and profitable strategy for investing in your company’s long-term growth and success.

 


6.   Resources

The ELFA maintains the Equipment Finance Advantage website, which offers a variety of resources for small business owners:  


If you’re new to equipment leasing, these ten questions help you evaluate your options and assess the financing terms you’re offered. http://www.equipmentfinanceadvantage.org/10qs.cfm


This chart provides a point-by-point comparison of leases versus loans.http://www.equipmentfinanceadvantage.org/ef101/llc.cfm


Refer to this online glossary when you need assistance understanding terminology used in the lease agreements you’re offered. http://www.equipmentfinanceadvantage.org/ef101/glossary.cfm


This Digital Toolkit not only reviews the basics of equipment leasing, but also explains how it can work as part of your asset management strategy. http://www.equipmentfinanceadvantage.org/Toolkit/


Wondering which trends the equipment leasing industry is tracking this year and how these developments might affect your small business? This article provides an overview of what to watch.

http://www.equipmentfinanceadvantage.org/rsrcs/articles/10Trends.cfm


Time Value Software created this equipment lease rate calculator to help evaluate your leasing costs.

http://tcalc.timevalue.com/all-financial-calculators/lease-calculators/equipment-lease-rate-calculator.aspx

 


Bank of America, N.A. engages with Inc. to provide informational materials for your discussion or review purposes only. Inc. is a registered trademark, used pursuant to license. The third parties within articles are used under license from Inc.. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.


Robb-Hilson3.pngBy Robb Hilson

 

We recently released the spring 2015 Bank of America Small Business Owner Report, a semiannual study that uncovers the concerns, aspirations and perspectives of small business owners around the country.

 

We’re happy to say that confidence in the economy remains steady compared with one year ago. In addition, two-thirds (66 percent) of small business owners are optimistic about the growth of their businesses over the next five years. Sixty-four percent of small business owners, however, note that their businesses are still recovering from the “Great Recession” of 2008. Most have yet to reach a full recovery.

 

One of the notable findings of the survey is the tendency of small business owners to be self-sacrificing, putting the needs of employees above their own. Sacrifices include accumulating personal debt or delaying their own compensation, versus laying off employees or delaying employee compensation.

 

Employee appreciation programs are widespread and offered by nearly all (94 percent) of small business owners. Popular forms of expressing appreciation include team outings, spot bonuses, office recognition and extra time off. Small business owners also favor customer appreciation programs, feeling that repeat business stems from strong customer relationships. This sentiment is strongest among Baby Boomer owners.

 

Bank of America appreciates the tremendous contributions that small business owners make to the U.S. economy, which is why we’ve planned several special events throughout our “Small Business Month” of May. We’re hoping not only to honor small business owners but also to provide useful insights and expertise through special product offers and local events. In San Francisco, we’re proud to celebrate small business owners by being a presenting sponsor of San Francisco Small Business Week, taking place May 16-22.

 

We’ll also be hosting a Google Hangout on May 20 to discuss some of the themes that have emerged from our spring 2015 Small Business Owner Report. Panelists for the Hangout include Jill Calabrese Bain, Managing Director and Small Business Banking National Sales Executive, Preferred & Small Business Banking for Bank of America; Rieva Lesonsky, CEO of GrowBiz Media & SmallBizDaily.com; and Nikhil Arora, co-founder of Back to the Roots. USA TODAY columnist and small business expert Steve Strauss will moderate. We hope you’ll tune in by checking out the Bank of America Google+ page Wednesday, May 20, at 8pm ET.

SustainableEntrepreneurship.jpgA new generation of leaders is learning how to apply business practices to the pursuit of social and environmental missions, according to a new book entitled, Understanding Social Entrepreneurship: The Relentless Pursuit of Mission in an Ever Changing Worldhttp://www.amazon.com/Understanding-Social-Entrepreneurship-Relentless-Changing/dp/0415884896by New York University professors Jill Kickul and Thomas Lyons. Business writer Cathie Ericson recently caught up with co-author Lyons to discuss how business and social entrepreneurship skills complement each other, and why social and environmental sustainability can drive economic growth.


Click here to download the PDF.

Sustainability.jpgAccording to the 2013 Small Business Sustainability Report, 79 percent of the business owners surveyed reported that "offering green products and services gave their business a competitive advantage," and that sales actually spiked during the recent economic downturn. Whether your business runs a broad-based sustainability operation or is integrating green practices on a smaller scale, customers seem to be supporting those efforts with their wallets. Business owners are finding new and innovative ways to be both profitable and environmentally responsible, as these three entrepreneurs are proving.


Click here to download the PDF.

Entrepreneur_Obstacles_body.jpgby Erin O’Donnell.


Entrepreneurs have a reputation for being brash and bold innovators. And yet a successful company is built on more than a great idea. We asked a small business coach and a longtime business owner to identify some of the most common roadblocks to success, and share tips for clearing the obstacles.


Undefined goals

If you don’t know where you’re going, how will you know when you get there? That’s what business coach Jennifer Martin of San Francisco-based Zest Business Consulting asks her clients.


Martin says every small business owner must start with clearly defined, written goals. But some entrepreneurs skip this step in their eagerness to get to market. “They don’t actually take time to create a vision,” Martin says. Her solution: Create a two-year outline of everything you want to achieve, from a client base to market share to revenue.


Too many to-dos

With goals in place, it’s time to begin work in earnest. But Martin says many small business owners pile up the action items without prioritizing their to-do lists. They risk becoming overwhelmed because it seems like everything is a priority that has to be accomplished now.


That’s almost never the case, Martin says. “What they really need to be doing is focusing on the action that will get them traction,” she says. Make your own determination about where to put your resources. Devoting hours a week to promoting your business on social media, she says, may not bring you the same return as developing referral partners among other businesses who serve your ideal client or customer.


Entrepreneur_Obstacles_PQ.jpgRushing the process

One of the most important skills small business owners can cultivate is learning how to run their company at the right pace, says Karen Fichthorn, a founder of Fichthorn Brand Development in Sanibel, Florida. Try breaking a large task into smaller ones, especially if you’re still working another job while you get your business off the ground. “Achieve just one thing per day,” Fichthorn says. For example, if your list item is “Establish a trademark,” start by researching attorneys one day, then making an appointment the next. In a year, you’ll have achieved about 200 tasks on the one-a-day plan.


Fear of failure

On the contrary, an entrepreneur must be willing to make mistakes and learn from them. Martin says many business owners were fantastic employees, but they struggle with setting their own structure and being generous with themselves when something goes wrong. Instead of fixating on what went wrong, the experts say small business owners need to rally in order to find the lesson in the misstep or failure and keep moving forward.

 

Bank of America, N.A. engages with Touchpoint Media LLC to provide informational materials for your discussion or review purposes only. Touchpoint Media LLC is a registered trademark, used pursuant to license. The third parties within articles are used under license from Touchpoint Media LLC. Consult your competent financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

 

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