Lease Is More

Scoring the Lease

In theory, there is no interest associated with a lease. "You write the whole lease payment off, just like any other monthly expense," Lahti says. With a bank loan, on the other hand, you write off just the interest portion of the payment and take an expense for the depreciation of the underlying equipment.

Still, you may want to gauge the cost of lease financing. To do this, you must know the residual value of the equipment you're leasing. This is the value of the equipment at the end of the lease that you would have to pay to purchase it. For instance, suppose you lease a $12,000 forklift for $300 per month for three years, and at the end of the lease, the forklift's residual value is $4,000. If you then buy the forklift, your total cash outlay would be $14,800 (36 payments of $300, plus $4,000). Because the forklift cost just $12,000 new, the difference between the original price and the total cash outlay is the implied financing cost--in this case, $2,800.

If you decide to go with a leasing company, such an analysis is a good starting point, but other factors must also be analyzed when comparing one leasing company to another: namely, the upgrade value, the flexibility to extend or modify a lease, interim rent payments, search and documentation fees, and speed of approval.

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This article was originally published in the August 1998 print edition of Entrepreneur with the headline: Lease Is More.

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