Put the Advantages of Leasing to Work for Your Business
A lease is an agreement in which you have the use of a piece of equipment, but don’t own it. Today eight out of 10 businesses in the United States lease equipment, and approximately one-third of all new equipment is leased. How do you know if leasing is right for your business? What goes into the decision-making process to lease? How should you proceed once you have made the decision? The answers to these questions will enable you to realize the full benefits equipment can bring in running your business while maximizing the return on your equipment budget. The characteristics of leasing are unique from buying equipment with cash or a loan, and an understanding of the properties of leasing will help you make the right decision.
Benefits of Leasing
Flexibility and convenience are two of the benefits most frequently cited about leasing. As your business grows and your needs change, leasing allows you to add or upgrade equipment at any point during the lease term through add-on or master leases. With leasing, you can customize a program to address your needs and requirements regarding cash flow, budget, transaction structure and cyclical fluctuations. It also offers options including installation, maintenance and many other services.
First, understand that with leasing, you pay only for the time you use the equipment, rather than the whole value of the equipment. At the end of the lease term, the worth of the equipment is called its residual. This residual value is built into the lease pricing so that monthly lease payments are usually less than monthly loan payments. This benefit improves cash flow, an always-important consideration for small and start-up businesses. Another reason leasing improves cash flow is because it does not require a down payment or additional collateral, so it is equivalent to 100 percent financing. These benefits allow you to direct more budget dollars into revenue-generating activities.
Another advantage of leasing is the ability to transfer the risk of obsolescence and being left with out-dated equipment to the leasing company since the equipment can be returned at the end of the lease term. This also enables an equipment re-fresh so you can have the latest equipment affordably, and is especially important in rapidly evolving equipment categories such as computers.
Ease of equipment disposition is another benefit of leasing that cannot be underestimated. The costs of removal, environmental fees (in the case of some types of equipment such as computers), and remarketing, which under the terms of outright ownership can be significant, are avoided with leasing.
The treatment of operating leases for balance sheet management and tax reporting also make leasing advantageous. An operating lease is not reported as a long-term debt or liability, and does not appear on your business’s financial statement. So you enjoy the use of the equipment you need, while maintaining favorable debt to equity ratios and other financial measurements required by traditional lenders in the event that you need them. For tax purposes, operating leases are treated as overhead expenses so lease payments are deducted from your corporate taxes, thus avoiding depreciation write-downs over time.
Leasing also offers customized solutions that allow you to tailor a program to fit month-to-month or year-to-year cash flow requirements. For instance, seasonal businesses may be permitted to miss one or more payments during a low season without penalty.
Leverage The Benefits of Leasing
Now that you know some of the many benefits of equipment leasing, it’s useful to know how to apply them to your business situation. First determine how and for how long you plan to use the piece of equipment. The amount of flexibility your business requires will help you make the decision whether leasing or owning makes more sense. For instance, if you expect a sudden growth spurt, leasing can readily accommodate your needs.
Once you have evaluated how the equipment is to be used, you can determine the appropriate level of investment for a lease. Doing a simple cost/benefit analysis that compares the periodic leasing payment to the revenue you expect to generate from using the equipment will help you determine this.
Establishing a relationship with a leasing company is a critical component in the success of your leasing experience. Working with a leasing company that understands your particular industry will provide you with customized options that consider your business’s needs and requirements. Your leasing company should be attuned to your areas of focus, including cash flow, budget, tax and other considerations.
Manage Your Equipment Assets
Business managers who know the strategic use of equipment leasing can enhance their financial performance and capital productivity even further. Asset management is the ability to systematically plan, acquire, manage and recycle assets through a mix of owned, leased and rented equipment. The successful implementation of each of these stages has the potential to significantly impact the return and profitability of your equipment investment. Asset management entails all phases in the lifecycle of a piece of equipment from delivery to installation, use, maintenance and de-installation and disposal. Most companies do not have formal asset management programs in place, though there is a growing trend in organizations that use large amounts of equipment to establish them.
Your leasing company can be a valuable ally in your asset management efforts. Equipment disposal and remarketing, for instance, is a full-time job in itself, and is better left to your leasing company for whom the function is a core competency.
For further information on how leasing equipment can help you grow and operate your business better, visit www.ChooseLeasing.org. There you will find the 10 questions to ask before signing a lease, a lease versus buy analysis, a glossary of leasing terms, an analysis of the benefits of leasing, a directory of leasing companies and more.