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Despite recent record-low interest rates for bank loans, the majority of small-business owners continue to lease, rather than buy, equipment. A survey conducted last May among U.S. Small Business Administration members found that 86 percent lease some or all of their equipment, citing increased cash flow, no down payment and improved cash forecasting as the reasons for their decision.
“One of the benefits of leasing is that it offers customized solutions,” says Amy J. Holmes, CAE, vice president of communications for the Equipment Leasing Association in Arlington, Va. “A variety of leasing products are available, allowing you to tailor a program to fit your month-to-month or year-to-year cash flow needs. Some leases allow you, for example, to miss one or more payments without a penalty, an important feature for seasonal businesses.”
For cash-conscious range owners, leasing offers other benefits:
Asset management. Unlike a capital investment, where the range owner manages the equipment, in a lease, the lessor assumes risk of ownership, which includes disposing of the equipment at the end of its life cycle, Holmes says. In some cases, you can even negotiate for the lessor to pay insurance and maintenance expenses.
100 percent financing. Leases don’t require a down payment, and many times, there is very little or no money due up front—perhaps just the first or last month’s payment, says Holmes. In addition, leasing offers lower monthly payments than traditional financing options.
Tax treatment. If the lease is structured as a true lease, the Internal Revenue Service considers your payments to be tax-deductible overhead expenses. In addition, according to ELA, “the equipment write-off is tied to the lease term, which can be shorter than IRS depreciation schedules, resulting in larger tax deductions each year.”
Lease-to-purchase. Look at options, such as a dollar buyout at the end of the lease, allowing you to take advantage of lower monthly payments and own the equipment at lease-end. Keep in mind, however, that the IRS may classify this as a capital purchase, meaning your lease payments would not be deductible.
Flexibility. With many types of leases available, you can choose one that best fits your equipment needs, business goals and cash flow requirements. “For example, some lessees need one piece of equipment that requires a single contract. Other companies may continually acquire equipment and exercise a master lease that allows them to acquire many items within a single lease and avoid executing a new contract with every acquisition,” says Holmes.
Even with its promises of capital preservation, leasing isn’t an arrangement suitable to every business, and there are some administrative costs, including document and UCC-1 fees and taxes. When weighing the benefits of leasing to their operations, Holmes says, range owners should ask questions:
1. How am I planning to use this equipment?
2. Does the leasing representative understand my business and how this transaction helps me to do business?
3. What is the total lease payment and are there any other costs that I could incur before the lease ends?
4. What happens if I want to change this lease or end the lease early?
5. How am I responsible if the equipment is damaged or destroyed?
6. What are my obligations for this equipment (such as insurance, taxes and maintenance) during the lease?
7. Can I upgrade the equipment or add equipment under this lease?
8. What are my options at the end of the lease?
9. What are the procedures I must follow if I choose to return the equipment?
10. Are there any extra costs at the end of the lease?
There’s no question that acquiring new equipment can drain working capital whether you pay cash, take out a loan or lease the equipment, and your range’s resources will best determine which option makes the most financial sense. But leasing can be a money-saving move, particularly when you don’t have the cash but need the equipment.
More information on leasing and the pros and cons of various financing options is available online from the U.S. Small Business Administration and the Equipment Leasing Association. |
