If you don't understand the difference between a lease and a loan, you are not alone. Many business owners continue to finance their equipment the "old fashioned" way, through loans, because they don't fully understand the potential benefits of leasing their equipment. These benefits can be seen in four important areas, initial cost, equipment obsolescence, tax benefit and off balance sheet financing. Because of these benefits, many business owners are realizing that they do not need to own their equipment in order to conduct business. They only need to use it.
The first thing you need to know about equipment leasing is that it is 100% financing. Because a lease is essentially a "rental" of equipment, there is usually no down payment required to access the equipment your business needs. This directly contrasts most commercial bank equipment loans, which require a minimum of 10% and as much as 50% down payment. By comparison, most equipment leases will require only the first and last payment in advance of delivery. Even if you only need a small amount of equipment, this can result in a tremendous reduction in the "out of pocket expense" necessary to upgrade your equipment. This gives you the opportunity to put thousands of dollars of working capital back into your business, instead of giving it to your banker.
Another benefit of leasing your equipment is the ability to avoid "economic obsolescence". This occurs when a business equipment either cannot keep up with the demands of the market or lacks the technology to help the business remain competitive. Leasing your equipment helps to avoid obsolescence by allowing you to upgrade every few years. In other words, if the equipment appreciates, buy it. If the equipment depreciates, lease it.
In addition to the initial cost and obsolescence, leasing your equipment can also provide your business with a substantial tax advantage. While you should always consult with your tax advisor first, most equipment leases can be structured so that you can write off 100% of the annual lease payments. By contrast, current tax laws only allow a business to write off the interest paid on loans. However, because a lease is a rental and the business is only using the equipment, the business can usually write off all of the monthly lease payments just like any other legitimate business expense. Once again, this can result in thousands of additional dollars in working capital being put back into your business.
The last major advantage of leasing your equipment instead of buying is that leasing allows you to not show the equipment on your balance sheet. Once again, this is because the equipment is being rented and therefore actually belongs to a different company than the one that is using it. For this reason leases are often referred to as "off balance sheet" financing and this can be a tremendous advantage to many businesses both large and small. Big businesses prefer this option because they don't want to own millions of dollars in equipment. This equipment will depreciate substantially with the day-to-day usage. Whoever owns the equipment is responsible for the depreciation on their balance sheet. Also, large corporations may require that the board of directors approve any new loans to the business since. This can make it difficult for the management of the business to operate efficiently. But a lease is not a loan and therefore may not require approval by the board for the managers to get the equipment they need. In smaller businesses this can also be an advantage because they will not show additional debt on the balance sheet that will affect their ability to borrow money in the future. If you are considering selling your business, this may also make your company more attractive to potential buyers since you will be showing less debt on the balance sheet.
Because your Business Finance Consultant works with many leasing companies nationwide they can help you determine if leasing your equipment is right for your business. If you should decide to lease, they can usually get the equipment you need with just a simple, one page credit application. In many cases they can have the new equipment on site in as little as a few days.