To Lease Or Not To Lease?

That is the question. Equipment leasing makes Hamlets out of most entrepreneurs.

One of the greatest obstacles for entrepreneurs ready to expand their businesses is finding the cash to upgrade and buy additional office equipment. Sinking most of your hard-earned capital into needed computers, copiers, fax machines, phone systems and furniture can drop you into a bottomless money pit. Securing a bank loan is an alternative, but while you can use the bank's money for your purchases, you may be required to come up with the standard 20 percent down payment. In addition, bank loans usually offer little flexibility in the length of the loan, and they may not be totally tax deductible.

Before begging your reluctant banker for a loan, consider an option that keeps many small businesses afloat: leasing. According to the U.S. Department of Commerce, 80 percent of all U.S. companies lease all or some of their equipment. Most established businesses prefer leasing to avoid technical obsolescence without overspending. According to the Equipment Leasing Association of America (ELA), 77 percent of all leased high-tech equipment in the computer industry is either replaced or upgraded within 24 months.

Greg Loeschke of Farm Credit Leasing in Minneapolis advises customers not to confuse loans with leases. "A loan requires a [company] to invest a down payment in the equipment, or a first-and-last payment, and to finance the remaining amount, whereas a lease requires no down payment and finances only the value of the equipment expected to be depleted during the lease term," he says. "Securing a loan usually requires the borrower to pledge other assets for collateral," while collateral is usually not needed to secure a lease."

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This article was originally published in the February 1998 print edition of Entrepreneur with the headline: To Lease Or Not To Lease?.

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