From the October-12, 2009 issue of National Underwriter Property & Casualty • Subscribe!

Agencies Can Preserve Credit

With our economy showing mixed signs of an upswing, individuals and businesses alike are looking for avenues that provide the most cost savings and stability during these trying times--and independent insurance agencies are no exception.

Credit remains difficult to come by, and cash in the bank is a necessity. Credit risk requirements have tightened across the board, with lenders critically concerned about quality over quantity. Meanwhile, agents still have a business to run.

The typical insurance agency requires little capital for daily operations. However, there are instances such as expansion and acquisition that create substantial capital needs. In this economy, these occasions are becoming increasingly more difficult to navigate from a financing perspective.

To supplement your everyday financing plans, you might consider equipment leasing. This option allows you to reserve use of your agency's bank credit lines, while still having the capability to outfit your offices with necessary business equipment.

Free-flowing capital is every company's number-one issue. Necessary expenses to retain and promote business growth are eating up credit lines, and there is a shortage of other cash sources.

Leasing your business equipment can drastically increase your agency's financial agility, allowing you to conserve bank credit and keep cash that you can put back into your business for both operational and investment needs.

With lower monthly payments, your cash is not tied up in equipment, and instead the money can be available for marketing, working capital or managing cash flow through seasonality.

With technology and equipment changing at a fast pace, it has become increasingly important to keep your business competitive and on the cutting edge, rather than focused on ownership and management of the equipment you use.

Ownership can be risky, given the rate of equipment depreciation and obsolescence. There are also new environmental regulations to consider, which dictate proper disposal methods for technology devices that may be costly and time-consuming for your agency to comply with.

Given that under a lease, the lessor is typically the owner of the equipment, this structure allows you to remove most of the burdens associated with equipment ownership and disposal.

To keep up with our rapidly changing market, chances are you'll want to upgrade your computers, software and maybe even your phone system over the next two years. You may even need to add personnel or move into a different office.

Leasing can help you manage the demands of upcoming financial challenges and assist your overall business plan.

THE ADVANTAGES

Leasing offers flexible options and terms depending on your needs.

The three most common lease types are Fair Market Value (FMV), Fixed Price Purchase Option (FPPO) and the $1 Purchase Option ($1 Out). All three options typically offer 100 percent financing without any kind of cash outlay before your equipment is put into service.

o A Fair Market Value is a lease that would allow a business (lessee) to pay for the actual use of business equipment without taking on much of the obsolescence, maintenance and disposal risks of ownership. This lease type will offer the lowest monthly payment and terms typically up to 60 months.

Lessees can opt to trade up or add equipment during the lease--and when the term is complete, it may be extended or the equipment can be returned or purchased.

o The Fixed Price Purchase Option provides the benefit of ownership to the lessee, with slightly higher monthly payments. With this type of lease, the lessee may be able to take depreciation and interest expense and can add on equipment during the term of the lease. The Fixed Price Purchase Option lease has the same end of term options of the Fair Market Value.

o The $1 Purchase Option comes with higher monthly payments, but also provides ownership to the lessee if he or she so chooses. As the name indicates, it allows the lessee to purchase the equipment for $1 at the end of the lease term.

Not only does leasing offer flexibility, it also offers financial advantages that help you save money.

One hundred percent financing allows you to generate income from your equipment before paying a single bill. Most often you will have 30 days to use your equipment before making your first payment. Leasing can offer tax advantages, but they may not apply to everyone. Please consult with your tax accountants on how they may benefit your agency.

There are also several other options to think about that can affect the final cost of leasing that you need to consider before signing that contact. These are:

o One hundred percent financing may include "soft costs" such as service, maintenance and installation in your monthly payment.

o Fixed payments are available, locking in your rate to avoid inflation in the future.

o There are multiple purchase and renewal options available, giving you the best solution to fit your individual needs.

o Leasing frees up your working capital to be used for other business needs, or to store on your balance sheet.

o Take advantage of a Master Lease Agreement, allowing you to combine multiple pieces of equipment onto a single lease with one monthly payment.

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