Why Leasing Instead of Buying?

January 24, 2009

What is the actual advantage of Equipment Leasing instead of buying it? There can be several reasons. Many small businesses have to watch their overhead, as they usually have a tight budget to work with, especially when just starting out. Although comparing buying business equipment to leasing business equipment is always the prudent thing to do, most small businesses find that leasing will save them money – in the short and the long run. Some business equipment is an investment only in the fact that it helps a business run efficiently and become successful. Just like an automobile, however, the value of many types of business equipment will begin to depreciate the moment they are purchased. This is partly due, of course, to simple wear and tear. It is also due, though, to technology. Some business equipment can be updated up to a certain point, but there will come the time when it will be rendered almost obsolete by technological progress. Unfortunately, this can often happen before the equipment has reached the end of its normal life span. Having to replace business equipment is costly, and becomes even more costly when a business cannot sell or trade in their old equipment for anywhere near a reasonable price.

Leasing, however, can help small businesses avoid this problem. Businesses that need production machinery or technical office equipment can benefit from leasing. For one thing, leasing seldom requires a down payment, and leasing payments are generally lower than mortgage-type payments. This is because they are not usually subject to high interest payments, and are usually spread over longer periods of time. Leased equipment can be updated on a regular basis as needed, and the old equipment can simply be returned to the leasing company, making it a simple and efficient process.

There are other advantages to leasing versus buying or obtaining a bank loan.  They are as follows:

  • Liquidity: The #1 reason businesses fail is due to lack of liquidity. Maintaining ample cash balances in your checking account should be a top priority for a company of any size. Leasing allows you to conserve your cash for times when you need it most.
  • Convenience: Unlike a bank loan, Leases generally require less financial documentation, meaning they require less preparation and are easier to secure. Some banks want two to three years of detailed credit history, and financial reports, while leases often require only six months of history or less. Often a one-page application is enough to obtain a lease for up to $75,000.
  • Quick Turnaround: If your company is like most, timing is everything. Who has time to undergo the lengthy and burdensome credit approval process required by most banks? Upon receipt of your credit application, you can expect a response from most leasing companies within 24 hours.
  • 100% Financing: That means a company can acquire essential operating equipment and begin using that equipment immediately to generate revenues with NO large down payments. Leasing companies will fund 100% of the cost of the equipment, including delivery costs and installation costs. Bank financing usually ends up meaning that you pay for your own installation costs .
  • Off Balance Sheet Financing: Leasing is the perfect tool to acquire new equipment without further leveraging your company’s balance sheet. If additional debt may jeopardize an existing bank borrowing covenant, an operating lease may be the perfect solution to your next equipment acquisition.
  • Flexible Payment Options: Leasing is an extremely flexible financing tool. Unlike bank loans that only offer fixed, level payments, leasing can offer flexible payment options. Many leases can provide for step-up, deferral, skip and/or annual payment programs, that will match your company’s cash flow.
  • Flexible Terms: Budgetary concerns over new equipment purchases can be circumvented through equipment leasing. Operating budgets tend to be more flexible than a capital budget. The lease terms can be as flexible as required and are often negotiable on an individual basis. Lease terms are usually much longer than a standard bank loan, which makes their payment terms even better.
  • Conserve Bank Lines: If your company has been successful in establishing a borrowing relationship with a local bank, why use up the available funds on an equipment purchase that is easily financed via leasing? Again, conserve your bank borrowing availability to support your company’s ongoing cash flow needs.
  • Used Equipment: Often banks are only interested in financing new equipment purchases. While it may offer you an added opportunity, used equipment often presents added challenges to bank lenders who are typically less familiar with the useful life and resale values associated with used equipment. Regardless of whether or not you plan to buy used equipment from a dealer or private (third) party, a good leasing company will likely have a variety of equipment leasing options from which you can choose.
  • Other Considerations: Many bank loans often require additional collateral other than the equipment being purchased.  Bank loans usually require extensive monthly reporting.  Finally, many bank loans can be cancelled by the lender at any time.  None of this is true for a typical lease.

Jeff Battiston, www.GlobalCapital-LLC.com

Jeff is Founder and CEO of Global Capital Services, a company that provides financing to business and municipalities.  Jeff is also an Independent Distributor for SendOutCards, an internet-based system that allows users to send personalized “hand-written” cards by US Mail.

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