WHEN ECONOMIC conditions signal changes may be ahead, it’s difficult for businesses to project future revenue. Yet for golf courses, the grass keeps growing and courses need to be maintained. That requires equipment.
In warm-season markets with heavy year-round use, it’s essential to refresh your equipment fleet on a routine basis. But tightened budgets make the deci- sion to buy or lease tougher than ever. Use these considerations to help make the choice that’s best for your course in today’s economy.
Getting Started
Before you make any decisions, it’s im- portant to start with a well-thought-out acquisition plan. Weigh your current stock of assets against your needs, then deter- mine if you have the capital budget and cash available to cover those needs. Think through your goals and what gives you peace of mind.
If it’s important to you to have a fresher fleet to draw upon, to have the latest tech- nology, to lower your maintenance costs, to have at least part of your fleet under warranty and to get the best course condi- tions possible within your budget, leasing makes a lot of sense.
If your preference is to purchase equipment and you have adequate cash to meet your resource needs, buying your equipment is also an option. You’ll need to be prepared for higher maintenance costs over time, but you may be able to balance it by enjoying some time with no payments to make.
Let’s look closely at both options in terms of financing, which can help you get the equipment you need now.
Finance Option 1: Leasing
A lease is similar to a long-term rental. You acquire equipment and use it for the lease’s term. When the time is up, you typically have the option to renew the lease, purchase the machine at fair mar- ket value or return it. You get the most bang for your buck because you’re only paying for the portion of the machine’s lifecycle that you use.
Why do golf courses choose leasing?
Many say operational considerations drive their decision more than financial considerations, but ultimately, both are important. In all economies, leasing is usu- ally best for higher-usage items you plan to cycle through more quickly or want to avoid the higher maintenance portion of the equipment lifecycle. Leasing is also generally viewed as the best choice when capital expense funds are limited.
Many golf courses also indicate that fair market value (FMV) leasing makes it easier to more closely follow their acquisition strategy. Importantly, FMV leases must be accounted for in the balance sheet as a right-of-usage asset and liability. However, a FMV lease generally results in a lesser amount of additional asset and liability than owning. This is because instead of putting 100% in the liability column of your balance sheet, you’re now putting the net present value of the rental stream on your balance sheet, so the number is reduced.
Finance Option 2: Conditional Sale Contract
Many courses traditionally purchase equipment with installment payments. This is called a conditional sale contract (CSC) and is sometimes referred to as a buck out lease. It’s best for long-life assets you plan to keep for an extended period, such as aerators or tractors that you may not use every day but are still mission- critical for certain tasks.
By purchasing, you own the machine subject to a security interest by the finance company. It’s listed as an asset and liability on your balance sheet, so the depreciation and interest expenses may be tax deduct- ible for taxpaying enterprises. However, because of changes in the corporate tax rate, interest expenses and depreciation
of ownership may be worth less than they used to be. Plus, tax deductions are only valuable if you have income to offset with them, so if you’re in a situation where your income is challenged because of the economy, then the value of the deductions is reduced even more. Your accountant or tax preparer can help you sort through this in more detail and find the best solution for your situation.
Additional Considerations
No single solution works for everyone. The decision comes down to cash flow. Whether you choose a lease or CSC, the first payment is often all that is required in advance. You can even include installation costs, sales tax and other installation ex- penses in the financed amount to further reduce your upfront cash outlay.
Financing may allow you to consolidate multiple units into a larger purchase that could potentially qualify for “volume incentives” from the manufacturer. You could also bundle the equipment, installation costs and services into a single payment that meets your budget. Plus, financing expands your purchasing power, allowing you to maximize the dollars you have available on a predictable schedule. The main takeaway is that financing options are tools you can use in any economy to execute your business plan more effectively, but they are especially helpful at times when your immediate resources are limited.
Paul Danielson, Sr., is financial services manager with The Toro Company. He can be reached at [email protected].