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E CONOMICS Leasing Meets Cash-Flow Demands Leading companies offer leases for operating and capital needs By Andrew Adams f you make shower curtains, your in- put costs aren't going to change much between September and March; it's a different story with making wine. Right as a winery is expected to make good on grape contracts, its winemaker also may need to pay for new French oak barrels. One or two ill-timed breakdowns with forklifts or the bottling line could further exhaust the cash or credit supply. Traditional lending may not offer enough flexibility to handle the cash-flow demands of wine, which is why many win- eries have turned to leasing when it comes I to some of their necessities. The option is especially well suited for supplies like bar- rels, which have short lifespans, but it also can be employed for high-cost assets such as tanks or bottling equipment. Leased equipment usually comes with simple monthly payments that most companies say they can structure to ac- commodate winery cash cycles. Operating leases are appropriate for items with quick depreciation and shorter lifespans. Capital leases are best used for higher value assets with longer lives; the cost of buying the equipment is built into the lease payments. The way a lease is structured will de- termine the tax benefits on it as well. The payments on an operating lease are usu- ally deducted as a monthly payment, while 36 WINES & VINES SEPTEMBER 2012 equipment purchased through a capital lease can stay on the winery's balance sheet as an asset while its depreciation value is deducted. Take advantage of tax benefits Chuck A. Shaheen of Fresno, Calif.-based Affiliated Equipment Financing Inc. said growers and winemakers thinking about lease arrangements for new equipment should do it this year to take full advan- tage of the potential tax benefits. Under Section 179 of the tax code, companies can expense up to $125,000 for business property purchased in 2012 and take 50% or 100% bonus depreciation. "It's an incentive this year to buy it and expense it," he said. "You're going to be paying it off with cheaper dollars." The maximum deduc- tion falls to $25,000 in 2013. Leasing spreads out the cost of a pur- chase, but it also means a company has more cash to focus on growing the busi- ness. Setting up a lease can also be much easier than trying to secure a loan through a bank, Shaheen said. "Today you're only as good as your last balance sheet of profit and loss," he said. "When you don't have money nobody wants to talk to you." A lease also won't require collateral other than the items leased. If something does go Leasing can be a good option to acquire barrels, which have short lifespans and quick depreciation rates. The financing option also is worth consid- ering for expensive and durable investments such as harvesters and solar panels. Highlights • The article explains how leases differ from loans and what types of winery equipment are suitable for leasing. • Leases have tax advantages, especially this year, and are a popular choice for alternative energy installations. • Barrel leases have become the specialty of at least one firm, H&A Financing & Services. wrong and you can't meet your obligations, the lessor can only repossess the leased equipment rather than seek compensation by placing liens on other property or assets. Shaheen said a lease comes with a fixed rate and also can't be called in. Mission Capital in Santa Rosa, Calif., caters to the wine industry by leasing barrels and other winemaking equipment. The company's president, Jerry Guffey, said that despite the tax breaks on new assets he still has not seen much interest from wineries in leasing big-ticket items. That could be because most wineries still aren't seeing the income to warrant such large deductions. "If you don't have a lot of income, you don't really need that to defray your taxes," he said. WINE INDUS TR Y FINANCE