Leasing

Equipment Leasing

 

Keep your cash for the investments that will give you the highest return…not a depreciating asset when you can avoid it.  Two hemispheres of thought; Only spend money on what you must spend it on and finance the rest conversely, have  at least a plan to dissolve any financial burdens on the company such as leasing strictly because of the interest charge required to fund it.  You obtained the equipment because it’s required to generate you income however, it reduces your profitability over the long term.   

 

Leasing is simply the use of machinery, vehicles or other equipment on a fixed term rental basis, avoiding the need to invest capital in equipment. Ownership of the equipment lies in the hands of the financial institution or leasing company, while the business has the actual use of it.

 

One way to keep equipment costs under control is to lease instead of buy. Today, just about anything can be leased -- from computers and software, to heavy machinery, construction equipment and complete offices. The kind of business you're in and the type of equipment you're considering are major factors in determining whether to lease or buy.  If you're a new business and only need one computer, for instance, it may makes more sense to buy one.  On the other hand, if you're opening an office that will have several employees and require a dozen computers, you may want to look into leasing this equipment and keep your cash for the payroll purposes.

 

 

Leasing advantages include:

 

  • Lower monthly payments than you'd have with a loan

  • Establishing a fixed financing rate instead of a floating rate

  • Tax advantages,

  • Conserving working capital

 

The equipment also shows up on your income statement as a lease expense rather than a purchase. If you purchase it, your balance sheet becomes less liquid.

 

Leasing Disadvantages:

 

  • You may pay a higher price over the long term (though possibly offset by tax savings).

  • Leasing commits you to retaining the equipment for a time period.
     

Compare the costs of leasing to the expected rate of return of the equipment, examining the business case to understand if a deal makes sense. What is the lease costing you? What is the expected increase in your revenues? Compare those numbers to the cost of depreciating the same piece of equipment under a finance contract, and you'll quickly see which is the more profitable route.  Regardless of your love for an accountant, their profession brings some great rewards too…here is where they can help you!

 

New Ventures often find leasing equipment an ideal way to establish a responsible credit profile for future borrowing needs – this is part of the long term plan.

 

Sale-Leaseback

 

Customers may opt to sell their assets to free up their valuable cash they’ve invested already, while maintaining their rights to use the asset through immediate leaseback.  The cash proceeds from the sale can then be used for other more pressing needs the business requires - paying down debt, enhancing liquidity, capital improvements or preparing for potential acquisitions et al. Notwithstanding, there are taxable benefits too, depending on use. 

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