"How are you going to pay for this?" We have all been there, and those words are always the first words out of the bosses' mouth. They have to be. The boss is responsible for the entire company and everyone working in it.

How do you pay for what you need to do the job the right way? For those of you responsible for these decisions, there is good news; you have two possible options to choose from.

Many of us were raised to pay cash, or to think of dollars within this year's budget. Those are both methods which are used today, but they restrict you to your own limitations within your company's money. So what if there was a more efficient way to hold on to most of your money and use other peoples' money to grow?

Like most of us, I have been around equipment leasing most of my life and either just enjoyed a company car and/or prepared cost savings proposals to justify equipment to management. From there, big brother took over and just made it happen. In both cases, the question, "How does the company really pay for this," never really entered my mind not until I owned my own manufacturing company and saw first hand what it can do.

Together, with two partners, my company purchased an 89-year-old company, which had not advertised in 35 years, and had some pretty selfish scheduling and delivery practices. After the company turned those things around, growth was next on the agenda, and we did that the way we had always known cash/credit for equipment and cash flow for all other bills. Did it limit us? Of course. We were only using company money.

Four years into ownership, we decided to lease/purchase some new equipment. The first thing apparent was the · mechanic didn't have to spend his time constantly on the floor fixing machines creating down time. Production went up, quality was better, delivery times went down, orders went up because of delivery times and that gave us the freedom to go after and get new customers. One of the reasons to feel good was that we knew what our budgeted monthly payments were on new equipment not how much money will be needed for parts and repair time.

Since the mechanic didn't have to spend all of his time fixing our equipment, he was able to begin pulling apart the old machines and making as many quality ones as possible as well as saving all the working spare parts. The spare parts cost reduction alone paid for a portion of the monthly lease payment to the point where my suppliers were calling, asking why I had not ordered in months. They told me they would have to raise all my prices because I fell out of the large purchaser category. I told them to do whatever they had to do, because it would be a long time before had to order in those mass quantities again.

Three years later, all equipment was paid for out of the monthly profits; we had more then tripled the size of the company, and I sold my part to my partners. Almost sounds like a fairy tale, but while you are living it for the first time, you always have concerns about what you are getting yourself into.

Everyone Wins

So what did it do for everyone? Exactly what it should have done. Everyone got their piece of the pie, and we were doing business with companies, not just one order at a time. The vendor was paid 100% on time by the leasing company. The leasing company was paid on time by us, and after the last payment, we assumed ownership of the equipment. We enjoyed the benefits of the equipment during the lease, being able to keep up with orders made the payments and gave us a reasonable profit.

What did we have to give up to get set up? That was the easy part information. Good, sufficient information for dollars wanted. Did we have to personally guarantee the lease? Of course. Our ownership of the business was not in control long enough for the amount of money we wanted. We felt good about our business, felt in control of our business and needed another avenue to advance to the next stage to use other peoples' money to help us grow.

Since then, leasing has become part of my life. But those basic reasons for doing what we did are exactly what companies do that are more profitable and grow at a faster rate. They use very little of their own money, and future profits make the budgeted payments.

Thought Process

After it was all over, I had a chance to look at the whole picture. The two things that stuck out for me were: 1) The only real money we took out of our pockets was the initial payment for the lease, about seven percent and 2) All the monthly payments were far less than the monthly profits from that equipment, so essentially, our customers paid for the equipment. What we did is exactly what happens with any employee. The money to start the lease is the training money for an employee, and the profits from future orders are how we all get paid or make lease payments. No one I know gets paid years in advance for work not yet performed, and we did essentially the same thing by leasing our equipment.

What wasn't part of my thinking back then was when we paid cash, we were paying about 34% to 36% (average corporate tax rate) more then the agreed price, because we paid with after-tax dollars. When we made the lease payments, we paid with pre-tax dollars, and when I worked out the math, we ended up paying less by leasing, then paying cash with money we had already paid taxes on.

Now I know why 35% of the companies in this country use about 90% of the $360 billion used yearly by leasing. They understand the benefits and make those advantages work for them on all their equipment.

We were part of the other 65%. Most of the people we knew leased a copier or company cars or nothing at all. Our whole group thought the same way. If you don't have enough cash, are new in business or your credit isn't real good, then you lease. There are those reasons, and we were in that group, but once it started working for us, we wanted to be part of the first group.

Level of Money

How can we be realistic with our request for money? What credit people look for in all backgrounds is the ability to control debt or pay back on time over a period of time and at what level of money. This is true on our personal credit ratings and is true with company credit ratings. If a million dollar company wanted 10 $3,000 machines, that is very logical for that size of company. If the same company wanted a $500,000 machine, it may get done, but there would be a lot of conversation and a lot of paperwork required to make it happen. If a $300 million dollar company wanted a $500,000 machine, no one would think twice about it. It fits with their money level, and that size company got there by being able to control debt over a long period of time.

Two Choices

Companies have advantages that we do not have in our personal lives, so let's take advantage of them. We have all heard of the theory KISS, or Keep It Simple Stupid, and that is what leasing does for all of us. When anything hits our company doors, we ask, "Is it going to appreciate in value, or am I going to add profit to it?" If the answer is "yes," then use your credit line or check book it's a quick profit and the money goes back in your checkbook. If it is going to depreciate in value, then we lease it. It is long term, so we get to use tax advantages and other peoples' money to pay for it. It would be nice if the rest of life was as easy as making one of two choices. So if your company is in a situation of whether to buy or lease, look at what functions the equipment will provide you with. Making the right choice cannot only save you from getting headaches, it can save your checkbooks.

Mike Hickey is the owner of Millennium Leasing. The Company specializes with vendors having up to mid-priced equipment and with finance plans covering credits from A+ to start ups. To get in touch with Mike, e-mail him at mikeh@millenniumleasing.com or for information on Millennium Leasing, visit them at www.millenniumleasing.com.