Choosing the right type of financing for your equipment purchase has too many after-tax profit consequences to be left up to chance.

In today's business world, obtaining equipment can challenge even the most financially savvy business owner. Not only is finding the right equipment a chore, but choosing a manufacturer and securing financing can be a difficult process. A fitness facility needs to evaluate its equipment acquisitions based on cash reserves, the financial condition of the business and how long it will use the equipment.

Equipment can be obtained in four ways: renting, cash payment, bank loan or leasing. Determining the costs of such options is rarely easy. Each method has separate advantages and disadvantages. If a piece of equipment is needed only for a short time or will quickly become obsolete, common sense dictates that it should be leased or rented. After all, what facility wants to own outdated or unneeded equipment?

At the root of every purchasing decision is the financial condition of the fitness facility. New clubs and ones that suffer from cash flow problems may not have the necessary funds to purchase equipment outright. In these cases, leasing or renting equipment is the best option. Established fitness facilities that do not want to create additional debt on their balance sheet may want to lease, since leasing is usually reflected as "off balance sheet" financing. Once the financial position of your facility has been considered, with anticipated use and life of equipment being weighed, the final decision comes down to the costs of each option.

Renting

Equipment rental allows you to utilize the equipment without the disadvantages of direct ownership, such as upkeep and repairs. Renting is a good approach for short-term projects (three months or less), but doesn't make sense for a company that will use the equipment on a continuing basis, since rental payments can be twice as much as bank and lease payments. A fitness facility should consider renting equipment if it has a temporary, seasonal or occasional need for certain types of equipment, or if it wants to evaluate the benefits and usefulness of various types of equipment. One major advantage to equipment rental is that you may return the equipment at any given time. Rental payments, like lease payments, are usually 100 percent tax-deductible.

Cash transactions

Buying equipment with cash can be suitable if a facility is in a solid cash position and doesn't want to accrue finance charges. In many cases, paying with cash looks like the least expensive method; however, the true cost of paying with cash depends on the percentage of return on your investment from the facility or the investor. If you have a cash rich business and are able to pay cash for equipment, you can qualify for depreciation benefits. The average fitness facility is permitted to write off up to $17,500 in newly acquired equipment each year. Paying with cash, however, diminishes cash reserves, leaving less available capital. This may prevent opportunities to expand your business that could allow the equipment to pay for itself.

Loans

Bank loans in today's economy can be an attractive form of financing. Be aware that banks often require information such as financial statements, tax returns and personal financial statements of the principals involved. Banks look at used equipment based on its age and condition, and may choose to finance only a portion of the cost. In many cases, the loan value of the equipment is roughly 75 percent of the cost.

The greatest use of a bank loan is for expansion or when a company needs a short term cash infusion. Banks offer lines of credit to aid companies with short-term financing issues; however, it is best not to use a bank line of credit for any equipment-related projects that represent longer-term investments. If a club owner has long-term plans, the "lost opportunity costs" of using a bank line should be considered. For instance, if other opportunities are to be taken advantage of, such as investments in land or buildings, it will be necessary to have access to capital in a rapid and easily accessible manner. Use of bank loans for long-term projects ties up the needed funds for short-term projects.

Leasing

Capital conservation, flexible terms and 100 percent financing are just a few of leasing's benefits. In addition, leasing provides a tax break, which compliments cash flow and seasonal slumps. Tax benefits can permit a club to expense 100 percent of its payments every month of the term, and the payment to the lender is made with pre-tax dollars.

Say your club grosses $5,000 a month, and you are financing $36,000 of commercial fitness equipment with monthly payments of $843. Since most companies are taxed at roughly 30 percent, $1,500 of your $5,000 profit goes to Uncle Sam. In the case of a lease, the $843 paid to the lender can be deducted from the $5,000, leaving a taxable amount of $4,157. Take the same tax rate of 30 percent, and the taxes owed drop from $1,500 to $1,247. A savings of $253 is realized because the lease payment is expensed. If you multiply the effective payment by the lease term, that would be $590 multiplied by 60 months for a total of $35,400. Notice, this is less than the original cost of the equipment.

Acquiring assets through leasing becomes even more desirable as equipment costs rise. Many companies choose to acquire more sophisticated equipment through a lease rather than a purchase. Generally, leasing companies require lower down payments than other financial institutions. The typical lease transactions require one or two advance payments to execute the lease. This represents approximately 2 to 5 percent down. Also, all the incidental costs associated with the transaction such as sales tax, installation and other soft costs can be rolled into a lease. This will free up cash for other club expenses. Leasing is designed to free up cash and improve a club's financial statements.

Renting, cash purchases, bank loans and leasing can all help your facility acquire the equipment it needs. Each has distinct advantages and disadvantages, but the mistake most companies make when looking to finance is not considering all the facets of their business. Everything from a project's length to business growth plans should be looked at prior to deciding how equipment will be financed. The question to ask is, will the acquisition of equipment, whether leased or purchased, increase income or result in insufficient funds to pay for it?

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CONTACT DAN PACE AT FIRST FINANCIAL (800) 956 7313