In 2013, an excess of $1.2 trillion dollars was spent on equipment acquisitions in the U.S., approx. 69% of which was secured through loans, leases or other financing arrangements. Equipment Leasing has long been utilized by a vast majority of businesses but whether or not it’s the right choice for you depends on a number of factors. If one can spend X number of dollars, why would they want to spend $X + interest?? Here are some reasons to consider.
Conserving cash would be the most obvious advantage. Depending on the conditions of a business, it may be more beneficial to conserve cash for working capital. Whether it’s to invest in future growth or just safe keep as a cushion for uncertain times, having enough available cash on hand is an important key factor for any business.
Conserving credit lines can be equally important. Banks are an important ally for any business and tying up available credit lines can be devastating. Knowing when to utilize banking lines and when to preserve them is crucial for any successful organization.
Equipment is a vital component for any business and hefty upfront costs can make it difficult to obtain. Most equipment leases only require one or two months in advance whereas bank loans can often require a 10%-25% down payment. With a lower initial investment, businesses can quickly obtain the equipment they need to operate. The sooner it takes to get the equipment, the sooner the equipment can begin to pay for itself.
Leasing often allows businesses to purchase better equipment. If forced to pay for equipment upfront with cash, the latest and greatest equipment models may fall out of budget. With low monthly payments, better equipment becomes more affordable.
Leasing also allows one to continually upgrade equipment every few years to avoid obsolescence. All equipment eventually becomes old and needs replacing. The term of a lease should correspond with the general life expectancy of the equipment so when the term is up, it’s usually time to get new equipment. Keeping equipment new and state-of-the-art is a must for retaining happy and loyal customers.
All leases fall under two categories; capital and operating. Each follows a different accounting procedure and each provides specific advantages as well as disadvantages to a company’s financial statement.
With capital leases, equipment is viewed as an asset and monthly payments are considered a liability. With this type of lease, equipment can be depreciated over time, which in turn can generate tax deductions and defer tax payments. These types of leases are reflected on a company’s balance sheet.
With operating leases (Fair Market Value leases), monthly payments are instead seen as an operational expense and are not reported on the Balance Sheet. They are considered a “rental” of equipment as opposed to a purchase. With a lower asset base and lower liabilities, companies can provide stronger balance sheet ratios thereby inflating the financial statements of the company.
Disclaimer: Your specific situation should be discussed with your CPA and tax adviser before making any tax decisions.