As CFO of a young high technology company, you feel pretty good about the future. The company, which has modest revenues but no profits yet, just received first round funding from an institutional venture capital firm. Now you're all set to buy some additional equipment.
But wait. Before dipping into your cash, consider a lease line of credit.
"Many CFOs ask me, 'Why do we need a leasing company now that we have our venture capital financing?'" says Barbara Hughes, Regional Marketing Director in the San Marino, California, office of Leasing Technologies International, Inc. (LTI). "Leasing allows young high technology companies to preserve investor's capital, which should be used initially to fund research and development and, in later stages, for marketing and distribution."
Companies like LTI provide over $500 million in lease lines of credit for early-stage, venture backed technology companies. These one-year credit facilities range from $200,000 to $2 million, with most in the $500,000 to $750,000 range, and finance leases for computer, office automation, telecommunications, production, lab and test equipment, and to a lesser extent, furniture. Typical lease maturities run 18 to 36 months.
Rates vary based on the credit characteristics of the lessee. Currently rates range from 8 percent to 12.5 percent for leases without warrants - before taking into account fair market value purchase options or other end-of-lease options. If a company chooses to offer warrants to the lessor, the rate would be in the 5 percent to 9 percent range. Some venture leasing companies require warrants for their transactions, while others provide proposals with or without warrants.
important benefits. "Companies can finance 100 percent of the equipment
cost, and lease payments are fully tax deductible," explains John
Moulton, partner in charge of Deloitte & Touche's Orange County High
Technology Group. "Another selling point for some high tech firms
is the ability to structure the lease as an off-balance sheet financing,
to clean up the company's balance sheet before an IPO." Other advantages
What if a company has already purchased equipment and runs into a cash crunch? "That's not unusual," comments George Parker, LTI's Executive Vice President, CFO, and co-founder. "When you raise millions of dollars, it seems like more than enough cash. A year later, you may have run through three-quarters of it. With a sale-leaseback transaction, the leasing company buys recently acquired equipment and leases it back to the lessee. It's a good way to generate cash."
Moulton recommends that companies get competitive bids from several leasing companies and compare the proposals carefully. They should analyze the impact of structuring the lease line with and without warrants. In addition to rates, it's important to evaluate all lease terms, including notification requirements, security deposits, and servicing requirements. End-of-lease options with regard to the right to return equipment at the end of the lease term also vary among lessors. Be sure you know who the leasing principal is that provides the funding. It's risky to sign a lease proposal with a broker unless funding arrangements are already in place. The broker should then put you in direct contact with the leasing principal who will be the signatory to the lease agreement.