A good way to keep a business moving ahead without jeopardizing operating capital is to consider equipment leasing. Buying a piece of equipment with cash on hand might make sense in some situations, but leasing that same piece of equipment can have benefits not readily apparent to some business owners.
ELFA or the Equipment Leasing and Finance Association, an industry organization that monitors equipment leasing and financing companies across the country, released the results of its 40th annual survey of the industry at the end of July. It reported the industry saw new business volume grow by 6.7 percent in 2014, the fifth consecutive year that businesses have increased their spending on capital equipment.
ELFA also reported in its “What’s Hot, What’s Not In Equipment Leasing for 2015” report that, according to a survey of members in 2014, leasing construction equipment, railroad equipment, trucks and/or trailers and machine tools remain high for 2015 and the aircraft and hi-tech equipment and computer equipment categories improved the most in year-over-year comparisons. Categories include agriculture, aircraft, construction, industrial and manufacturing technology, IT/computer, medical equipment, oil and gas, railroad and trucking.
There are five major benefits that come to mind that argue in favor of leasing equipment rather than buying it outright or financing equipment purchases.
One of the most important reasons to lease needed equipment rather than buy it outright is being able to keep operating cash in order to do what it needs to do – operate the business. This is an important benefit for startup businesses to consider. Some businesses may need more than a year’s worth of operating capital on hand to successfully navigate opening. That can be hard to accumulate; there is no need to tie up needed funds by spending it to buy equipment right at the start.
Second, some business owners may be able to get 100 percent of the amount financed, rather than having to pay a down payment in order to finance purchase of the same equipment through a more traditional loan.
Another advantage to leasing equipment is that the terms for leases may be much more flexible than those for purchase loans. A leasing representative may have more opportunities to structure the plan and payments in a way that is favorable to a business owners’ fiscal schedule. Traditional purchase loans usually are much more rigidly structured and may not work as well with a business’ calendar.
A big advantage to leasing equipment is that leased or rented equipment is considered differently on the balance sheet than purchased equipment, and therefore, usually creates a tax advantage to the business rather than a tax liability. When a business pays for equipment with cash, it is paying for that equipment with post-tax dollars, which is essentially adding those taxes to the sales price of the equipment itself. Leasing equipment may allow the owner to use pre-tax dollars and classify that expense as a deduction against revenues before taxes. Since the leasing company retains ownership of the equipment during the long-term rental agreement, the owner can then write off the lease payment as an expense. Talk to your accountant to find out if leasing will benefit your business at tax time.
And finally, another benefit to leasing equipment is that professionals will evaluate the equipment for the business owner, there is no need to be an expert about the equipment in order to know the exact value of it. And some lease terms may allow for periodic upgrades to the equipment so the business can have the most up-to-date equipment on hand to benefit the customers. That can be a major advertising point for a business in a crowded and competitive market.
Leasing equipment may make more sense for some businesses than others. Please talk with your accountant or financial planner to find out if your business is one that can benefit.
