Many small business owners face major financial challenges when financing new equipment, including phones and computers as well as capital equipment. Leasing instead of buying can be a cost-effective solution, especially if you don’t have enough cash but still need the equipment.
Even if you don’t have the money to invest, leasing might be a good option. You might find leasing a better way to manage your cash flow. Instead of one lump sum payment, you get regular, predictable monthly installments. Leasing can be a great way to avoid credit lines and you may want to use the money in another area of your company.
How leasing works
You are granting the rights to the lessor when you sign a lease. Lease-holders own the equipment and make it available for you to use in return for lease payments. Leasing equipment can be done in many ways. These are some of the most popular:
You can then leasing equipment from a vendor and seek financing through a lender. The vendor you choose will provide the system and then you can negotiate a lease agreement with the leasing company. This scenario allows you to continue receiving support and service from the vendor rather than the lessor.
If you are looking for equipment, it is best to work with a manufacturer or retailer that offers leasing through its subsidiary. Your vendor will convert the purchase price into a lease payment according to your terms.
You can obtain equipment directly from a lessor. This route will allow you to work directly with a leasing company to determine what equipment you require and what you are able to afford. In this case, the lessor will provide the lease and equipment. You may wish to shop for equipment before you sign the lease if you decide to lease equipment and lease from the lessor. Your technical information is not always available at a leasing company.
Leasing has its advantages and disadvantages
These are the top issues to be aware of when leasing.
Leasing comes with the disadvantage of not owning the equipment after the lease ends. This can be a disadvantage, especially for equipment such as computers, where technology requirements may change quickly.
Total cost — Leasing is almost always less expensive than buying, provided you don’t require a loan to purchase the equipment. A 3-year lease of a $5,000 computer system at a rate of $40 per month for $1,000 will cost you $7,200.
Leasing arrangements are more flexible than loans when it comes to finding funds. Although a bank may require 2-5 years of records from a business before they will grant a loan to you, most leasing companies look at your credit history for a shorter term (6 months is a common length). This is a huge advantage for start-up businesses.
Cash flow — This is the main advantage of leasing. Leasing eliminates one large expense, which can drain cash flow. This frees up funds to pay for other daily expenses.
Taxes — You can almost always expense equipment costs by leasing, so your lease payments could be used as business expenses. Buying equipment may be able to deduct $19,000 in the first year of purchase (part of first-year expense deduction); any excess gets depreciated over many years. The “real cost” for a $5,000 computer system could be as low as $3,400 with the first-year expense deduction.
Technology is changing rapidly. You may end up with obsolete equipment within 2-3 years if you purchase a computer or other high-tech equipment. You may be able to test out new configurations and keep your system current to stay ahead of the technology curve by leasing. If you have a policy of “passing down” technology (where it is used by some departments), then buying might be more efficient.