To hold or not to hold—that is the question.
The bigger question, of course, is how you will structure your company as you grow. Weighing the options (and oh, are there many) can be complex. One rabbit hole you may be looking into is forming a holding company.
Our blog today will focus on defining holding companies, whether leasing heavy equipment through one could make sense for your business, and where they're headed. This is the first of a four-blog series, so bear with us as we lay the basic terms and groundwork for later conversations.
Obligatory Disclaimer: Thank goodness really smart people told us to add this… This blog post is for informational purposes only and should not be considered tax or legal advice. Please consult with a qualified professional for guidance specific to your business, goals, and situation.
What is a Holding Company?
Imagine your business as a theater piece, like a play or a live musical adaptation of American Psycho (yes, that exists).
The actors (your employees) perform the script (your daily operations) that creates the product or service (the plot). A holding company is like the set behind them—a separate entity that owns the assets (props, costumes) you use during the production.
In straightforward terms, a holding company is a legal entity that owns one or more operating companies. The operating company focuses on generating revenue through its core business activities, while the holding company holds assets like buildings, equipment, and investments. This arrangement is especially common in manufacturing industries, where the cost of revenue-generating assets (and the properties that house them) is exceedingly high.
Why Consider a Holding Company for Leasing?
Here are some benefits of leasing heavy equipment through a holding company (besides bragging rights that you now own two companies!):
- Asset Protection—Can’t Touch Me!
Separating equipment from your operating company can potentially shield it from lawsuits or liabilities common during daily operations. If a lawsuit targets the operating company, the equipment owned by the holding company might be off-limits. It’s like how you didn’t get in trouble when you broke your brother’s toy that one time. - Financial Flexibility for those Rainy Days.
Holding companies offer more flexibility in managing finances. Profits from the operating company can be distributed to the holding company as dividends, potentially offering tax advantages depending on your situation. Bookkeepers love this kind of puzzle-solving.
Strategic Investments Through Operating Profits.
The holding company can reinvest profits into acquiring new equipment or exploring new business ventures without impacting the operating company's cash flow. If you’ve worked with us before, you know cash flow is one of our biggest target areas.
Leasing vs. Financing Through a Holding Company
Leasing and financing look similar on paper, but there is one critical difference you’ll look at when calculating your business’ future. Whether you choose leasing or financing for your heavy equipment depends on your specific needs and cash flow situation. Here's a just-the-facts overview:
Heavy Equipment Leasing: Leasing, when structured the right way (ask us about this) *can* offer lower upfront costs, allowing you to conserve cash for other business needs. This can include financing the entire asset and structuring a larger residual (end of term payment) . However, in some of these cases you don't own the equipment outright at the end of the lease term. For businesses with clear exit strategies, this keeps operating costs down and a clear path once you’ve decided to sell/ exit (yay- retirement or business round 2!!)
Heavy Equipment Financing: Financing allows you to own the equipment outright once the loan is paid off. However, it requires a more considerable upfront investment—something many business owners are unprepared to fork over.
Choosing the Right Local Lending Partner
Today’s blog looked at the what of holding companies. Next, we tackle the why.
Whether you choose to use a holding company or not, finding a reliable local lending partner is crucial for securing leasing options for your heavy equipment needs.
Prime Capital is a trusted provider of heavy equipment leasing solutions. We offer competitive rates, flexible terms, and personalized (some would say too personal) service to help you find the right solution for your business. Contact us today to discuss your equipment needs and explore the options available, including leasing within your shiny new holding company!
