Finances preventing you from launching or expanding your business? Leasing may be the answer. Today's leasing companies supply virtually everything-from cars, trucks, office equipment and furniture to machinery, computers, communications devices and store fixtures. Qualifying for equipment leasing is generally easier than getting approved for a loan, and terms are usually more flexible.
But is leasing right for you? First consider the cost (the difference between buying and leasing), then evaluate the pros and cons of each method. Leasing lets you get and use equipment you can't afford to buy, reducing your upfront cash outlay. However, your ultimate cost over the life of the asset may greatly exceed the purchase price, had you opted to buy.
But ask yourself this: Will having use of that equipment generate income that offsets any long-term cost differential? If your option is financing the purchase of equipment, you must factor in any financing costs. Leasing generally requires no down payment.
Additional advantages of leasing include:
- Tax deductions of lease payments
- The value of maintenance and repair provided by the lessor
- The ability to upgrade equipment to meet your changing needs
- The improved appearance of your balance sheet (if leased assets are excluded)
- No restrictions on your ability to borrow additional funds
Then there's the other side of the leasing coin (even beyond the higher costs that a thorough cash analysis will reveal):
- You have no equity in leased equipment-although you might consider negotiating a purchase option, crediting part of the lease payments toward the purchase price.
- You probably can't cancel the agreement, so you're committed to making payments for the entire period, whether you use the equipment or not.
- While you may write off payments, you can't deduct the depreciation.
Bottom line: Leasing is more expensive over the life of the asset, but you have immediate access to equipment with little upfront investment, thereby freeing up cash for other expenses and investments. Carefully weigh the benefits and the drawbacks before signing that lease.
Paul DeCeglie (deceglie@smallbizmail.com) is a former staff reporter for Journal of Commerce and American Banker.
Make A List
If you decide to lease equipment, keep these points in mind:
- Deal only with reputable leasing companies. Visit their offices, and call other customers about service, reliability and responsiveness. Ask the Better Business Bureau and others about past complaints.
- Demand full disclosure of all taxes, service charges and fees.
- Have your attorney or accountant review any agreement before you sign. Request a copy of the contract and all documents at the time of signing-do not accept that a copy will be sent to you later.
This story appears in the November 2000 issue of Startups. Subscribe »
