By leasing, you're only buying the best years and most trouble-free usage of the item.
Why Lease?
A lease is simply a financing contract, just like buying. But you only pay for the time that you use the item rather than its total cost. Your initial cash outlay is significantly less, freeing up the money to be used for other purposes. Your lines of credit and sources of capital aren't tied up in equipment. Instead, they're available for opportunities such as inventory, marketing, working capital or personnel.
Leasing allows you and your business the use of equipment that is vital to your success, without having to own a depreciating asset or drain more of your operating budget than is already necessary. It costs less initially and per month than buying, and has tax benefits that buying doesn't. When the term is over, you can walk away from the equipment or buy it... with the advantage of having used it first to assure that it meets your needs.
Anyone who doesn't want to put their money into "depreciating" assets should be leasing. By paying cash for your equipment, in time your purchase is worth consistently less, but you keep paying as though it were new. By leasing, you're only buying the best years and most trouble-free usage of the item. As a business owner, you know that staying current with your support equipment can make all the difference, and by leasing you have more money available to take care of other important operating expenses. There is significantly less paperwork with leasing and no complicated depreciation schedules to maintain.
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Leasing Advantages
Leasing is the way to go to keep you competitive in the economy of the 21st century.
- Low Initial Cash Outlay – usually only two payments in advance is all you need to get started.
- Flexibility – all of the costs associated with your project can be financed, including soft costs such as installation, training, delivery, extended warranties, maintenance agreements, etc. With a bank, money is usually only loaned to cover the equipment and other tangible (hard) costs. The rest comes out of your pocket.
- Fixed Rates - the rate is set at lease commencement and will not change through the life of the lease. Bank lines of credit usually fluctuate depending on the market. This makes the lease an excellent hedge against inflation.
- Longer Terms and Smaller Payments – terms are available up to 72 months. The maximum term with a bank loan is typically 36 months.
- Increase Your Buying Power – leasing provides a great source of secondary funds separate from your bank line of credit. It’s like having a second line of credit separate from your bank, and a wise business owner knows it’s not prudent to put all of their eggs in one basket.
- Keep With New Technology – leasing makes it much easier and more convenient to replace outdated technology and obsolete equipment with new state of the art equipment to keep your business on the leading edge of your industry.
- Little Collateral - Typically the equipment being leased is the only collateral needed for the investment. A bank will want to take a lien position on all of your business assets, including all of your free-and-clear owned equipment, inventory, and accounts receivable.
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Leasing vs. Bank Financing
| |
DSC Lease |
Bank Financing |
| Interest Rate |
Fixed rates and payments |
Rates are usually adjustable |
| Term |
Usually up to 5 years, and up to 7 years over $200,000 for hard collateral |
Usually 2-3 years, and the bank must be made whole annually |
| Down Payment |
100% financing |
Typically 20-30% of total cost |
| Financial Statements |
Not mandatory under $150,000 and financials are NOT required annually after approval |
Required on almost all transactions over $10,000, and banks require annual updates to maintain loan |
| Financial Reporting |
Not required to be shown as debt on your balance sheet |
Carried on balance sheet as debt |
| Sales Tax, Installation, Training, Freight/Shipping |
Leasing is 100% financing and covers all of these costs |
Must be paid by your company in advance…can add up to thousands |
| Hidden Requirements |
None |
Compensating balances, other bank charges and loan covenants |
| Tax Benefits |
Usually 100% deductible over the term of the lease |
Depreciated over the IRS’s useful life of the equipment |
| Effective Cost |
Lower than bank financing due to tax benefits, lower/no down payment, longer lease term and no required compensating balances |
Higher cost due to longer depreciation schedule, larger down payment, adjustable interest rate, and other hidden charges |
| Opportunity Cost |
Frees bank lines and cash, allowing you to invest further in your business |
Ties up bank lines, possibly preventing opportunities to expand your business |
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Leasing vs. Cash
Is cash always King? Not always. Paying cash for equipment has significant drawbacks when compared to leasing.
- Leasing should be used to acquire depreciable assets such as equipment, so that available or excess cash can be spent on things that are not traditionally financed such as sales, marketing and personnel.
- Leasing preserves working capital
- Leasing protects obsolescence
- Leasing allows for the acquisition of equipment without a substantial cash outlay
- Leasing offers tax benefits
- Leases can be custom-tailored with skip payments or deferred payments for seasonal businesses
- Leasing permits upgrading equipment without impeding cash flow
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