PrintWhen it comes to getting business equipment, there are two main options: buy or lease. In the current economic and tax environment, leasing may offer important tax and cash flow benefits, as well as other financial bonuses.
The majority of companies in the United States today lease some or all of their business equipment, reports the Equipment Leasing and Finance Association. Companies that lease tend to be smaller and growth-oriented, more focused on productivity, and more technology-oriented, according to ELFA.
Virtually any type of business equipment can be acquired via a lease. This includes computer equipment and software; copiers and fax machines; construction, manufacturing, and medical/dental equipment; office furniture; telecommunications and point-of-sale equipment; and business vehicles and aircraft.
The benefits of leasing come from the fact that it’s using equipment, rather than owning it, that increases a company’s productivity and profits. With leasing, businesses have access to the equipment they need to run more efficiently and are able to preserve valuable capital for other growth opportunities.
There are several different types of leases that have various features and benefits. Depending on the type of lease chosen, the potential benefits of leasing include:
- No down payment: A lease provides 100 percent financing with no down payment, which helps conserve capital and free up valuable cash for deployment to areas where it can earn a higher return on investment -- like marketing or hiring additional support staff, for example. In addition to the actual equipment itself, other “soft” costs (like delivery and interest charges, sales taxes, and installation and training) can also be rolled into the lease. This usually isn’t the case with an equipment loan.
- Conserving cash flow: Lease terms are flexible and payment schedules can be structured to meet the cash flow peaks and valleys of a business, thus helping companies better match revenue and expenses during ramp-up periods or times of seasonal fluctuations. Equipment can be acquired at a fixed rate for a fixed period of time, which helps make budgeting and cash flow forecasting more accurate. With a lease, equipment is paid for as income is generated by its use, not before.
- Protection against obsolescence: Today’s cutting-edge technology can quickly become tomorrow’s bargain-basement discard, which makes equipment life-cycle management critical. The flexibility of leasing helps provide protection against equipment obsolescence. By permitting regular equipment upgrades and replacements, leasing helps companies avoid making payments on long-outdated equipment.
- Preserving credit lines and personal credit rating: Many businesses owners place a high priority on keeping credit lines clear and their personal credit ratings high. With leasing, lines of credit and cash reserves remain free and liquid to meet other working capital needs that may arise. Also, leases have no impact on personal credit ratings.
- Potential tax savings: Depending on the type of lease chosen, there may be significant tax benefits when compared to buying equipment. With a capital lease, the lessee can depreciate the asset and deduct the interest portion of the payment. Leasing may also reduce exposure to the alternative minimum tax. Consult with your tax advisor for more details on the potential tax benefits of leasing.
Read the next article in Don Sadler’s leasing series, “Types of Business Leases.”
Don Sadler is a freelance writer specializing in business and finance. Reach him at don@donsadlerwriter.com.
