There is an old adage in finance (personal finance or business finance); if the asset depreciates, lease it; if it appreciates, then buy it.
We have already seen this take off in the auto industry over the last two decades or so. Leasing cars and trucks has become a great way for consumers to get into vehicles quickly with little up front money. Many times, not only do consumers not have to put down large sums of money to lease vehicles, they can usually leverage these lease deals and get into vehicles that they may not have been able to if they were to purchase the vehicle.
This works for individual automobile purchases as well as for entrepreneurs needing equipment for their small businesses.
The following are 5 reasons why leasing may be better for your company:
First, Cash Balances: Leasing does not require you or your business to use up its cash reserves. If you purchase a piece of equipment outright, you must use your cash balances to do so. Leasing can help you keep that needed cash in your business for other obligations like payroll or inventory or expansion while still getting the equipment you need. Further, leasing generally requires less down payment or other up front costs should you considering other forms of financing - like a loan. Again, keeping your needed cash in the business.
Cash Flow: Leasing generally requires lower monthly payments. Here is why. If you finance an equipment purchase, the loan will be matched with the useful life of the assets. Let's say that your equipment has a useful life of 5 years. Thus, your loan will be amortized over those five years. In leasing, the leasing company takes into account the residual value of the asset. Think about why auto leasing payments are lower than loan payments. This is because at the end of the lease, the car or leasing company gets the vehicle back and can resell it as a used vehicle. Leasing companies for business equipment do the same thing. Even though they may amortize the equipment over 5 years, the amount being amortized in lower - resulting in lower monthly payment. This helps the business from a day-to-day cash flow perspective. Less money going out each month during the lease period is much more beneficial to the business than having an asset that can be sold at the end of a purchase contract. Would you rather have lower monthly payments for 5 years or a used asset that you have to sell 60 months from now?
Further, with less initial cash outlay and lower monthly payments, your business should be able to purchase more equipment - more equipment could mean better productivity, reduced labor expenses, and the ability to increase or expand the business.
Tax Advantages: Most leases, depending on how they are structured, can be written off on the business's taxes as a general operating expense. This means that 100% of the expense (not just the interest or depreciation) can be written off. Being treated as an operating expense not only lowers taxable income but also does not show up as debt on the company's balance sheet.
Time and Effort: Leasing is a very simple and efficient process. Leasing companies usually don't require long application processes, time consuming background checks, or mountains of paperwork prior and after the close.
Lastly, Depreciation: Like automobiles, the moment you drive off the lot, you lose up to 15% of the marketable value. The same is true with business equipment. Thus, if you purchased this asset, you would be immediately upside down. Further, with new technology developments, you may purchase a piece of equipment that becomes obsolete in a year or two. If you purchased, that purchase now becomes a sunk cost. If you leased, you could just return the equipment and replace it with the new technology.
There is a reason that the auto industry has really embraced leasing vehicles. It turns out that it is better and more affordable for their customers. The same is true with leasing business equipment. Plus, following the simple adage of finance - if it depreciates - lease it. May be the savior of your business.