"Take a Closer Look at Leasing"

Reprinted from Technology Times, Spring 1998
- A periodic newsletter from Deloitte & Touche

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.

Leasing offers 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 include:
· Quick turnaround time.
· Greater operating flexibility from lack of restrictive covenants.
· Standard, streamlined documentation.
· Protection against technological obsolescence.
· Fixed rate for each drawdown under the lease line.
· Lower financing costs compared to the opportunity cost of using venture capital.

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.

Is Leasing for YOU?
Lessors that provide venture leasing look for certain company characteristics. Here's the profile of a typical client:Early stage technology company, minimum of 1-2 years old.

  • Strong management team, good product, and well thought out business plan.
  • Recipient of at least $1-2 million in financing from and institutional or corporate venture capital investor.
  • Revenues of at least $50,000 per month; pre-profitability stage, about $200,000 monthly losses.
  • Good cash position - 8-12 months coverage of current rate of monthly loss.
  • Positive net worth, minimum of $500,000.
    Often 12-18 months away from IPO or merger.