Leasing equipment

For many small business owners, financing new equipment is difficult. Leasing can be more cost-effective than buying, especially if you don’t own the money but still require the equipment.

Leasing is a viable option even if there's no cash available. Because you receive regular monthly payments instead of one lump sum payment you may find it easier to control your cash flow. Leases can save you from having to tie up credit lines, and you could use the money for other purposes.

How leasing works

By signing a lease, you give the equipment's rights to the lessor. The equipment is owned by the lease-holder and made available to you in return for the lease payments. There are many options for leasing equipment. Here are some of the most commonly used:

Choose leasing equipment and then apply for financing through the lessor. Locate the system you want and work out a leasing contract with the leasing firm. In this case, the vendor will provide support and service, while the lessor may not.

Working with a manufacturer, retailer or manufacturer that offers leasing through its own subsidiary is a good way to select equipment. Your vendor will convert your purchase price into a monthly lease payment, based on the terms that you request.

You can get equipment directly through a leasing company. If this is the route you choose, you will work closely with a leasing firm to determine what you need and what your budget can handle. The lessor pays for the equipment and lease. If you have decided to purchase your lease and equipment through the lessor you might want to shop around for your equipment before taking on the lease. You may not find the right place to obtain technical information from a leasing firm.

Leasing offers both advantages and disadvantages

Here are some issues you should consider when considering leasing.

Ownership -- Leasing is not the best option because you lose ownership of the equipment when your lease expires. However, this can also be an advantage for equipment like computers, where your technology needs could change very quickly.

Total cost -- Leasing almost always costs more than buying, even if there is no need for a loan. You will pay $7,200 for a 3-year leasing agreement for a $5,000 system, at a cost of $40 per $1,000.

Leasing is more flexible than loans for finding funds. Leasing companies often evaluate your credit history with shorter terms than banks. They may need to see business records for 2 to 3 years before they grant you a loan. This can be an advantage for a startup company.

Leasing has the greatest advantage in cash flow. Leases eliminate one major expense that can drain your cash flow.

Taxes -- Leasing allows you to deduct your equipment expenses as business expenses. You may be able, as part of first year expensing, to deduct $19,000 for equipment you purchase. Anything above that amount is depreciated over the years. With the first year expense deduction, the "real" cost of a $5,000 computer systems may only be $3,400

Technology advancements are rapid. Technology requires -- Technology is always changing. If you own a high-tech computer or equipment, it is likely that you will end up with outdated equipment in 2-3 year's time. Leasing allows you to experiment with new equipment configurations and keeps your system up-to-date. A "pass-down", or policy that allows older technology to be used in certain areas of your company, may make buying more cost-effective.