Leasing is often the ideal solution to meet the equipment and space needs of start-ups and small businesses. These fragile enterprises are always cash tight and leasing equipment - from cars to computers - doesn’t require a large cash outlay at a time in the business life cycle when "cash is king."
Leasing also eliminates the need to obtain a traditional loan - a monthly expense that may tie your hands, limit options and slow business growth. Leasing is almost always the best option for new businesses.
Whatever capital you have on hand or raise, can be used to grow the business, not pay for day-to-day operations. And that expands your opportunities and options significantly.
Leasing Made Simple
When you take out a loan to purchase equipment, you take possession of that equipment, but the lender retains ownership until the debt is paid. Only then does the equipment become yours. And, if we’re talking high-tech equipment like computers and servers, by the time you own it, the gear is out-of-date and unable to meet your ever-expanding business needs.
When you lease, you never own the equipment. The leasing company always retains ownership. You simply pay a monthly fee for the use of the equipment for a given period of time. When the term of the lease expires, you either return the equipment or purchase it for an agreed-upon buy-out price and it’s your option to buy or walk away.
That lease-to-buy option provides greater control over your cash and business activity from the day you put out the OPEN FOR BUSINESS sign.
The Many Advantages to Business Leasing
- Obsolescence avoidance. A key advantage to leasing is the fact that the equipment never goes out of date. If, at the end of the lease, the gear no longer meets your needs, you lease newer equipment, so your business is always on the cutting edge of technology.
- Tax advantages. Another advantage to leasing is lower taxes. When you lease an office copier, for example, your lease payments come right off the top line of your tax return as a business expense in the year the expense was incurred.
If you buy that same copier, you’ll see tax savings, but it can take five to seven years to depreciate the full value of that copier. Leasing provides immediate tax advantages that buying just can’t deliver.
- Lower initial costs. Leasing business equipment allows your company to acquire utile assets at low initial costs. Equipment leases, unlike traditional loans, rarely require a down payment. So, you get the copier or network server without shelling out a wad of cash when you need cash for other business purposes like marketing or expansion of service offerings.
- Flexible terms. Leases are easier to obtain and come with more flexible terms than loans for buying equipment. If your business is new, or has poor credit, leasing is not only cheaper, it may be your only option.
- Service is free. Lease that office copier and, when it breaks, the leasing company sends out a tech to fix it. Because you don’t own it, you don’t pay for expensive repairs or upgrades - an often overlooked benefit to leasing, especially high-tech gear.
The Disadvantages Of Leasing
- Higher total cost of ownership (TCO). Leasing is more expensive than an outright purchase. The total cost of leasing is often 10% to 20% higher than a purchase. But, that cost is often offset by no down payment requirement and new equipment every few years. No more worries that the office server will become a doorstop in three years.
- At the end of the lease you are not the owner. Leasing doesn’t build business equity. If you own the manufacturing equipment that makes the products you sell, you have a business asset that can be used as collateral, or to add value to the business when you sell. With equipment that has a long useful life, not owning what you paid for is a real disadvantage.
- You agree to pay for the term of the lease. If you no longer need the equipment, you still pay. Some lease agreements do allow for early termination, but early termination always comes with a penalty clause that you should read very carefully.
If you’re paying for a couple of cars that the company no longer needs for its sales force, that’s money flying out the window - and you may make payments for a couple of years on two cars that are just sitting in the parking lot. Not good planning, is it?
Buy or Lease?
In some cases, you may not have a choice of whether to buy or lease.
If you don’t have sufficient capital to make a down payment to secure a traditional loan, leasing may be your only option. The same is true if you or your business have poor credit or can’t, otherwise, qualify for traditional financing to purchase equipment.
If the equipment or work space appreciates over time, buy it and see the value of your business grow right along with the value of the building you bought to house your operation.
Conversely, if the equipment becomes less valuable each year, lease it. You avoid owning obsolete equipment and you have cash to grow your business to profitability faster.
So, if I will grow in value, buy it if you can. If the value of the equipment shrinks each year, lease it and let someone else worry about outdated equipment. You have a business to run.