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financial dimensions
The Rapid Prototyping Advisory From NCP Leasing
The ABCs Of Equipment FinancingHow would you like to have the latest and greatest RP system available in the current market? Well, you can. You can have any RP system you want, use it for as long (or short) a time as you want, and move on to your next latest and greatest without ever owning the equipment. You can do this with financing. Financing can:
So should you finance? And if so, what kind of financing is best for you? In practice, you probably ought to address the second question first. Financing can take the form of lease or rental. A lease is an arrangement under which you pay a specified amount each month for a fixed period of time. For example, you may agree to pay $6,000 a month for 36 months. A rental arrangement also involves a specific monthly payment, but the term is more variable; it can be as short as a few months or as long as four years, and typically runs about two years. There are two common forms of lease and one common form of rental. A lease can be a "capital lease," also called a "finance lease" or a "conditional sale," or it can be an operating lease. The distinction between these forms stems from the ways legal codes, accounting standards bodies and tax authorities treat various leases. A capital lease is basically an extended payment plan and resembles a mortgage. You pay a specified amount each month for the term of the lease, which is typically 48 to 60 months. By the time the lease has run to completion, you have paid the full price of the system. At the end of the lease, you can buy the equipment for a nominal fixed amount, usually one dollar. Just as it is with your home mortgage, you are also on the hook for property taxes, sales taxes, maintenance, and insurance. Who Picks What And Why Each type of financing arrangement has particular benefits. When you choose a plan, you are selecting the benefits that will do your business the most good. Here's a quick summary: Capital Lease:
Operating Lease:
Rental with Accruals:
An operating lease also involves payments over a term, but a shorter one that usually runs 24 to 48 months. There is actually a rule about the term: By definition under accounting rules, the length of an operating lease cannot exceed 75 percent of the useful life of the leased equipment. You won't pay the whole cost of the system either. In fact, you can't. Again by definition, the value of your payments (not counting interest) must come to less than 90 percent of the value of the system. At the end of the lease, if you want to buy the system, you must pay its fair market value. Your other responsibilities are the same as those that are part of a capital lease: paying property and sales taxes, maintenance, and insurance. Rental is simply a series of monthly payments paid in exchange for use of the system. The rental period will be short, usually no longer than two years. Rental with accruals is an arrangement under which a portion of the rent you pay each month can be applied to a purchase option on the equipment. The purchase option can be exercised (usually) after some point in the rental term (usually 6 months). There is a cap on the amount accrued toward the purchase. For example, you might have an arrangement under which 50 percent of the rent counts toward purchase but the total amount credited to you is limited to 40 percent of the purchase price. The purchase option price is then the acquisition cost of the system (at the inception of the deal) less the accumulated purchase option accruals. The specifics of the deal determine who pays taxes, maintenance and insurance. Each type of financing has a unique impact on your financial situation when it comes to the legal, accounting and tax treatment of the transaction on your books. A capital lease is treated as a sale, which is why it's called a conditional sale. (The condition is paying all amounts due, including that dollar at the end.) You carry the amount you owe on your balance sheet as an obligation; this amount decreases with each payment. The interest portion of your payments is a deductible expense, but the principal is not. Instead, you must depreciate the value of the system according to the tax rules in force at the time you sign the deal. An operating lease is quite different. The amount you are obliged to pay during the course of the lease does not appear on your balance sheet, which is why it is called "off-balance sheet financing." The full amount of each payment, including principal and interest, is a normal business expense, which means that it is fully deductible from income.  It's About Time And Money Each financing alternative has unique characteristics that shape the cash flow and duration of the agreement. The Accrual series shows the cumulative value of a portion of the rent that can be applied to purchase or lease. Rentals are also normal business expenses and fully deductible. Even if you agree to a specific rental term, your obligation does not appear on your balance sheet. However you finance the system, you will not have title to the equipment unless and until you buy it at the end of a lease or rental term. But you will have to take care of it as if it's your own, providing proper maintenance and insurance and paying sales, use and property taxes. In every other way, the system you lease or rent is completely yours to use as you wish. Now that you understand the ground rules, you can compare the total cost of alternatives and the effect each will have on your cash flow, balance sheet, and flexibility you want in a rapid prototyping system. As we said at the beginning, once you have seen what you pay and what you get in return, you are ready to decide if financing is better suited to your business situation than outright purchase. And once you have seen how it all works in the context of your business, it's not a particularly difficult choice to make. The numbers will pretty much speak for themselves. Something You Can Always Count OnFor twenty-five years, people running the numbers on financial transactions have used the Hewlett-Packard 12C calculator. It can tell you all you need to know about leases, mortgages, annuities and other transactions that involve compound interest. While you can run the same calculations using a spreadsheet package like Excel, as far as we're concerned there's really nothing as useful as HP-12C. It not only does the math, it gives you a feel for the way financing works. If you're willing to spend something like seventy-five bucks and put in maybe an hour or so reading an instructions manual, you can get to a point where you can handle just about any what-if kind of question about financing. You can see what happens to your payments if you take a longer lease. You can see how changing interest rates, which are going up lately in case you haven't noticed, affect the cost of financing equipment. You can see how a company like NCP leasing views the likely future value of an RP system, which in financial circles is called the residual value.  The Classic HP-12C For less than seventy-five bucks and with a little study, anyone can ask what-if questions about leases What you learn right away is that there the equations that define a simple lease have five variables. Serious financial specialists, such as those at NCP leasing, have written them on the fingernails of their left hand. (If NCP's experts were sailors, they would always carry a note that says, "port is left, starboard is right.") (And if NCP's staffers were southpaws, they would write their notes on their right hands.) The five variables in a compound interest calculation are, beginning with the one written on our pinky nail and moving towards the thumbnail, are called n, the number of periods (usually months) in the lease term; i, the interest rate per period; PV, the present value which in ordinary English means the value of the asset at the beginning of the lease; PMT, the monthly payment; and, finally, on our thumb, FV, the future value, which is the stipulated worth of the asset at the end of the lease. To calculate any of these five values using an HP-12C, you enter the four for which you have numbers and press the button for the missing item. The calculator knows what you mean and solves for the fifth variable. The way this all works, the calculator makes it easy to get answers to the common what-if questions. Here's an example: For a capital (or finance) lease, during which you pay for the full value of the asset, the future value (FV) is zero (or you can put in $1.00 if there's a nominal termination price). You'll have to know your interest rate, too. It's pretty easy to see how long you will have to make lease payments to complete the lease. You can very easily change the monthly payment amount and see how that affects the lease term, change the least term and see the impact on monthly costs and so on. Now that you've got the hang of it, you can compare the cost of that lease to the cost of an operating lease of the same length or, more likely, for a shorter period. You can figure out whether you can afford to finance an extra platform, maybe a used one, to handle extra work. You can see the financial impact of selling a system you own and leasing it back, which is a common way to free up capital locked into an asset you need to use but don't really have to own. And if you get good at it, you'll be able to do some trickier things, such as estimated the cost of refinancing a platform when you are in the middle of a lease. Usually, all the variables will change, particularly if you have an operating lease and the refinancing would extend the termination date. But if you're trying to squeeze another platform into your budget, a little bit of tapping on that calculator can help you open up possibilities for your build envelopes you couldn't figure work out the back of an envelope. About NCP Leasing, Inc.NCP Leasing, Inc., is the leading independent provider of financing for rapid prototyping equipment and a significant source of financing for other high technology assets. Founded in 1987, NCP provides a wide range of lease and rental structures to satisfy the needs of industrial and commercial companies. We have participated in over 200 RP transactions since 1994. We currently own RP systems at more than twenty Fortune 500 companies and a significant number of Service Bureaus. This experience gives us an edge when it comes to making accurate assessments of residual values and it enables NCP to offer lessees excellent value, flexibility and strategic guidance. NCP has considerable financial strength. We remain principals in all transactions. Our lessees benefit from dealing with their actual lessor rather than an agent or lease repackager. This can be a great advantage to lessees when circumstances indicate that significant advantages might arise if a lease is restructured during its term. 
Summer 2006 |