10/ 26/ 2004
by Jeffrey Moses
Leasing equipment has specific advantages when compared to financing or purchasing with cash. A clear understanding of these can help when considering the acquisition of computers and office equipment, automobiles, machinery and other types of equipment vital to a company's operations.
The main advantages include:
Capital conservation. Leases in today's financial climate can often be obtained with little or even no money down. When borrowing to make a purchase, cash out-of-pocket is required for a down payment -- money that can be used for other important business needs such as marketing, employee salaries, research, etc.
Leases usually require less financial documentation than bank loans, meaning they require less preparation and are easier to secure. Some banks want two to three years of detailed credit history, while leases often require only six months of history or less.
Because you can get into a lease with little or no down payment, it's likely that you can get more equipment or higher quality equipment than you can when buying outright or borrowing.
Even new equipment can break down. Most leased equipment is maintained and often even repaired without charge. This can take a load off your mind and save you considerably in case of major repairs.
When structuring a lease during times of rising interest rates, try to obtain fixed, monthly payments over the term of the lease. Not only will this protect you from inflation, it will also allow you to project future cash outlays with greater accuracy. Adjustable-rate leases and loans put you at the mercy of rising interest rates, whereas a fixed-rate lease will lock you into a specific interest rate.
Some leases allow the right to reduce payments or even miss an occasional payment without penalty. This could help during a temporary cash-flow slowdown.
Cancellation clauses in leases can allow you to end the lease at any time, simply by returning the equipment. This can be of benefit should you decide the equipment is not what you need or if better options arise. Usually, a fee is required to cancel, but not in all cases. Make sure that the cancellation fee is reasonable if one exists.
Leases often allow equipment upgrades or trade-ins during or at the end of the lease period. This can help you stay current with developments in the technology you're using. (To secure the right to upgrade, an "equipment substitution clause" or "current equipment substitution clause" should be included in your lease.) Also note that this type of agreement must be made directly with an equipment manufacturer or supplier, not with a financing company.
Leasing does not impact your financial statements, so your borrowing potential (through traditional bank financing) is not reduced, as it would be if you borrowed to make a purchase. It will make your equity-to-debt ratio look better. Also, lease payments are usually considered "pre-tax" rather than "after-tax." This means that you can write off payments for tax purposes, whereas when borrowing you can usually write off only the interest paid. Consult with your accountant or financial adviser for all tax consequences of leasing.
