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Pros and Cons of Lease Financing for Small Businesses

Operations

According to a recent survey by the Equipment Leasing Association, economic activity for leasing is on the rise. Simply put, more businesses are leasing the equipment they need for their offices and facilities.

It's hardly a surprising trend: For many small businesses, leasing provides a cost-effective alternative to buying their equipment outright. In fact, today it's possible for a small business to lease almost everything it needs, from computers to copiers to office furniture.

Just remember that there are both advantages and disadvantages to leasing. Your line of business, financial situation, and equipment needs all play a role in deciding whether leasing is the right option for you.

Here are some of the advantages to leasing:

  • Cash flow: Not having to spend a lot of money up front can help your business manage its cash flow more effectively, especially if you're just starting out. You'll most likely have a small down payment (or none at all), as well as a lower monthly payment than if you took out a loan to buy the equipment.
  • Deductions: Lease payments can be deducted as a business expense on your tax return.
  • Easier financing: If you have some strikes against you on your personal or business credit history, it's usually easier to get better financing terms with leasing than if you were trying to buy the equipment.
  • Support: Leasing agreements usually come with some sort of technical support from the leasing company. When you're in a jam, in-person service and toll-free support numbers can be lifesavers.
  • Keeping current: One of the best reasons to lease is that it means you always have access to the latest technologies. Who hasn’t bought a new piece of equipment only to have it become obsolete in a matter of months? Make sure the lease contract provides for upgrades as they become available.
  • Flexible terms: Leasing companies usually offer terms to fit your needs and budget, such as closed-end leases, open-end leases, balloon payments, and more. Be aware of all the risks that some of the terms could involve before you sign on the dotted line.

Here are some disadvantages to leasing equipment:

  • Overall cost: Just as with leasing a car, leasing equipment is almost always more expensive in the long run. Also, keep in mind that you build no equity in the equipment.
  • Early termination fees: Even if you no longer use the equipment, you're required to make the monthly payments. If you no longer need the equipment, there will be substantial early termination fees to end the lease.
  • Complicated terms: Make sure you fully understand the terms and conditions of the lease, such as required insurance on the equipment, what happens at the end of the lease, who finances the lease (it might be a separate company), and who is responsible for repairs.