Coming to terms
Equipment financing is a strategic option for governments to consider regardless of the economic climate. But, as budgets are cut and equipment demands continue, local governments that previously may have hesitated to consider financing are using it to acquire needed equipment to manage their organizations and continue services.
Government agencies have tools to tailor financing terms to their needs. For example, a government can include a non-appropriations clause in an equipment lease contract. Under the clause, the government (lessee) can terminate the contract at the end of the current fiscal year and return the equipment with no penalty if it is unable to acquire funds in the next budget to make future lease payments. Also, because local governments rely on property, income or other taxes, which may be due at certain times of the year, equipment leases can be constructed to defer lease payments until the revenue is collected. Or, if a government needs equipment in January but will not have funds available to begin paying for the equipment until the beginning of its fiscal year in July, payments can be deferred until then while the government uses the equipment.
Local governments that use equipment financing also can access low “tax-exempt” interest rates that are similar to the tax-exempt interest rates enjoyed on municipal bonds. The lower interest rates result in lower lease payments and lower total cost of ownership. In addition, most municipal equipment leases carry a $1 purchase option. At the end of the lease term, the organization will have paid the full purchase price of the equipment with interest and can buy the equipment for $1.
Local governments also may bundle all costs related to an equipment acquisition — such as sales tax, shipping, installation, equipment maintenance contracts and professional services — into one transaction. By combining all costs into one financing package, officials can issue a single purchase order to the finance company and capture all related expenses in one repayment schedule.
Funding through a municipal lease can be completed often in as little as two to three weeks. That is in contrast to a bond issue, which can take months or years to get onto the ballot for an election.
Legal fees and origination expenses tend to be much lower for equipment lease financing compared to other funding methods. While legal due diligence is performed, it is usually far less extensive and incurs fewer legal fees than those incurred through bond issues. That helps close transactions quickly, facilitating access to equipment.
While equipment financing may be new to some cities and counties, local leaders are finding that the flexible, customized terms equipment financing companies can offer make it a viable alternative to other means of acquisition.
Julia Pierce, public sector finance manager for San Jose, Calif.-based Cisco Capital, contributed to this article.
The author is vice president of State Government Relations for the Washington-based Equipment Leasing and Financing Association.