An equipment leasing decision can be the best alternative for small businesses when weighed against paying out a large sum of cash or going to the bank for a loan to acquire or upgrade equipment. Having your cash reserves invested in equipment makes you asset rich and cash poor. Cash poor companies cannot respond to changing market conditions or take advantage of new opportunities.
Today, more than 80% of all U.S. corporations lease some or all of their equipment. It is the use of equipment, not ownership of equipment that generates profits. This simple precept explains the rise of equipment leasing activity, especially as equipment life cycles shorten in this high-tech age. Whether opening a new business, expanding existing facilities or opening an additional location, the method you choose to acquire equipment can have a profound impact on your business, credit and cash flow.
Secret #1: Nearly any type of business equipment can be obtained through equipment leasing. With a lease, you can specify the manufacturer, the model number, even the source. You're covered by all conventional manufacturers' warranties. And because lease payments are usually lower than other forms of financing, your leasing dollar allows you to acquire more of the equipment your business needs or more advanced equipment. With an equipment lease, you get 100% financing so the amount of cash needed up-front is reduced. Most soft costs can be included: delivery charges, installation, training, and software to ensure that the equipment is productive immediately, speeding your return on investment.
Secret #2: Bank loans can be dramatically more expensive than anticipated because of the large security deposit that is required. Typically, a bank will want 20% to 40% as a down payment for equipment. The result is that the stated APR and the effective APR are extremely different. A stated 8% bank rate with a 25% down payment is actually equal to a 21% APR on a five year loan.
Secret #3: Even if you have the cash to purchase your equipment, purchasing is rarely, if ever, the best choice. With equipment leasing, cash can be used for other business requirements such as expanding sales, starting new marketing programs, offering quantity discounts, replenishing inventories, opening a new line of business, or increasing cash reserves. Using cash for necessary business expenses that cannot be financed is much more intelligent decision-making than spending it on equipment that is worth less and less as time goes by. If you decide not to lease you will have to come up with the entire amount for a cash purchase or a sizeable down payment, as well as higher payments for traditional financing.
Secret #4: With the lower, fixed-rate payments of an equipment lease, you're protected against inflation. Cash outlays are deferred, as compared to an up-front purchase. Inflation will then lessen the cost of future lease payments, since the payments will be made with "cheaper" dollars. You will be making your monthly payments to the leasing company with ever-inflating dollars during the term of the lease. This actually reduces the cost of financing to you in real dollars, a tremendous advantage that is often overlooked.
Secret #5: Leasing equipment offers a wide range of benefits, from consistency with expenses to increased cash flow. But perhaps the most significant advantage of leasing is the ability to maintain up-to-date equipment. Leasing allows you to easily and affordably add equipment or upgrade to a completely new piece of machinery to meet future needs. This lets you transfer the risk of being caught with obsolete equipment to the leasing company.
Secret #6: With the scheduled updating of your business equipment offered through equipment leasing, you can maintain a competitive edge, keeping you ahead of your competition. With an equipment lease, upgrading to newer technology during or after the lease is easy. In contrast, when equipment is purchased with cash or bank financing, there is an incentive to postpone any upgrade until the original investment has been recouped through depreciation, which hinders your flexibility. A planned replacement program avoids obsolescence and keeps you up to date with the latest state-of-the-art technology. In addition, ownership has an often-overlooked disadvantage - equipment disposition. The costs of removal, environmental fees (in the case of some types of equipment, such as computers), and remarketing, which under the terms of outright ownership can be significant, are avoided with leasing.
In summary, there are many "Secrets of Equipment Leasing" that require significant research to uncover. These "Secrets" can be determining factors in the survival and profitability of any business enterprise. As such, they warrant in-depth consideration to determine their potential contributions to every individual equipment acquisition situation. Nearly 100% of the time, bank loans and cash purchases are always significantly less beneficial and less advantageous than equipment leasing.
By Milton Franklin, Equipment Leasing Specialist
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