Annually, American businesses acquire over $1.3 billion in capital goods and software, excluding real estate. The majority of these companies make purchases utilizing equipment financing. Leasing represents a flexible alternative that helps organizations get the equipment they need to operate. Businesses choose to lease equipment for a variety of reasons, including 100% financing, cash preservation, production demands, seasonal cash flow, technology advances, tax oriented leases, etc.
100% Financing - Traditional lenders often require 10-30% down on an equipment purchase.
Cash Preservation - Leasing allows companies to otherwise use cash for R&D, expansion, etc.
Managed Obsolescence - Firms can get/utilize equipment that matches their production needs.
Inflationary Hedge – Companies pay for equipment use in current period dollars, rather than upfront.
Matched Cash Flows - Companies can have rental payments set to seasonal cash flows.
Current Technology - Software cost/installation may be included with cost of equipment.
Tax-Oriented Leases – The lessor receives depreciation benefit allowing the lessee to afford lower rental payments.
Finance Leases - Payments generally 100% deductible for lessee.
No Hassle Disposal- Management by third-party keeps company focused on operations
Structure - Fixed versus floating rate. Up to 7 years versus 1-3 on traditional loan.
Financial Statement Impact - Footnote to balance sheet. No impact to current or LTD ratios
Any growing business can benefit from leasing equipment. It provides a practical way to stay abreast of the latest trends and use the newest, most productive equipment without draining cash from your business or tying up important bank lines of credit. Your organization should consider leasing as an alternative to a traditional loan if:
- you are purchasing capital equipment
- are expanding or moving
- want to preserve liquidity
- have used up your allocated equipment budget
- are sensitive to ROA, EPS and/or ROE metrics
- you find yourself subject to AMT