It is possible to free-up working capital and have cash to grow your business in two words. These two simple words are...equipment leasing. For small business, a main issue is having enough capital to run and grow operations. Meeting tight payroll deadlines or buying more inventory is a real strain on the cash reserve.
When it comes to putting down a large sum of cash or going to the bank for credit to buy or upgrade equipment, an equipment leasing option can be a better alternative for small businesses. 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. Let's take a closer look at the advantages of equipment leasing.
Equipment Leasing Advantages
- Expense Item: Monthly payments on a lease are considered an expense, whereas a loan is considered a debt. The equipment leasing option can improve the financials and the net worth of a small business.
- Tax Savings: The equipment bought on a loan is depreciated over several years but the lease monthly expenses can be deducted in the current year. This can help maintain your bank credit line. Talk to your accountant for more details on your situation.
- Easier Funding: Banks often require business plans and several years of banking and credit. An equipment leasing company will not need a business plan and may only require 6 months of credit history.
- 100% Financing: Most common leases will not just cover the cost of equipment but the installation and maintenance cost conserving even more cash for the business. A no down payment option may be available for equipment leasing.
- Avoid the Technology Trap: With fast advances in technology, equipment such as your computer system will be out of date in a few years. Leasing this type of equipment allows you to upgrade the system every few years. If an asset depreciates over time, leasing may be the best option.
Given all the potential benefits of the equipment leasing advantage, it makes business sense for small business owners. But here are two downsides to equipment leasing. One, the cost of the equipment is much higher than an outright purchase. For example, a $3,000 computer system can end up costing $4500 over the life of the lease. Two, at the end of the lease contract the company does not own the equipment, the lessor does. So what is the best option?
Decide if your business needs to own the equipment or merely use it. A strong vision of where the company's strategic direction is heading and the future financial needs of the business is vital. If you are planning on selling the company in a few years, the higher net worth from equipment leasing can be more attractive to buyers. In the end, review or update your business plan and talk to your accountant.
