Cash – the elusive element in the life of any small business. It’s hard to get your hands on it when you start your venture and it’s hard to keep on bringing it in when the operation is in full swing. But, thankfully, there are other alternatives that will help you find and free tied up cash – leasing is one of them.
What is a lease?
A lease is a transaction by which a business pays rent on the equipment it needs until the life of the lease expires. In most cases, the equipment becomes available for little or no down payment, allowing businesses to preserve their working capital and lines of credit for other uses.
Leasing gives you some breathing space – it spares you from big upfront costs when initially purchasing equipment and saves you substantial amounts later in the life of your business when you need to invest in repairs, upgrades and maintenance.
The rapid changes in technology today usually render brand new equipment obsolete by the end of the first financial year. So if you use your lease to obtain items that may be outdated in a short period of time, such as computers or other high-tech equipment, you will be free to lease new, higher-end equipment after your lease expires instead of being stuck with equipment that is no longer relevant to your needs.
Leases are usually easier to obtain and have more flexible terms than loans for buying equipment, an advantage for businesses with bad credit or those needing to negotiate a longer payment plan to lower costs.
Lease payments can usually be deducted as business expenses on your tax return, reducing the net cost of your lease. Every country has different sets of rules, so make sure you discuss your options with your accountant.
Why not leasing
Higher initial outlay
Leasing an item will almost always end up being more expensive than purchasing it in the long term. For example, a 3-year lease on a computer worth $5,000, at a standard rate of $50/month per $1,000, will cost you a total of $6,800. Had you bought it outright it would have costed you only $5,000.
Obligation to pay for entire lease term
You are obligated to make payments for the entire lease period even if you stop using the equipment. Some leases give you the option to cancel the lease if your business changes direction and the equipment you leased is no longer necessary, but large early termination fees will apply.
You don’t build equity in the equipment. Unless the equipment has become obsolete by the end of the lease, this lack of ownership is a significant disadvantage.
Buying or leasing?
When deciding whether to buy or lease a particular piece of business equipment, think about the approximate net cost of that asset. Remember to consider the following items when making the calculation and final decision:
- Tax breaks,
- Resale value,
- Intangibles, i.e. obsolescence,
- What happens at the end of the original lease term (can you purchase the equipment at a deep discount?,
- Associated fees like documentation fees and late fees,
- Down payment or deposit.
Make sure the specific terms of the lease are carefully spelt out and always talk to a professional if in doubt.