If you plan to invest in new equipment for your business sometime soon, and were considering a traditional loan to finance the purchase, you might also want to look into leasing as an option. If cash is in short supply, and the equipment you need may become obsolete quickly, leasing rather than buying can be a good option.
No matter what type of business you are in, almost any equipment you will need to buy also can be leased. Companies of all sizes, from sole operators to Fortune 500 firms, use leasing. According to the Equipment Leasing Association (ELA), about $230 billion worth of equipment is leased by U.S. businesses each year.
Leasing can conserve precious cash. While a loan usually requires that you invest a down payment in the equipment, a lease generally needs no down payment and finances only the value of the equipment expected to be used during the lease term. And when you buy the equipment outright, you assume any risk of it becoming obsolete. Leasing transfers the risk of obsolescence to the leasing company, for a price, since there’s no obligation to buy the equipment once the lease expires.
Leases are not loans, so their costs are calculated differently. Payments on an operating lease are considered an overhead expense that you can deduct from your business income. Generally, however, the cost of leasing is similar to the cost of other financing options when you consider the entire transaction. Use your accountant or your local SCORE counselor for assistance in calculating these costs.
Flexibility is another leasing hallmark. You can tailor a lease to fit your month-to-month, seasonal or annual cash flow needs. And if customers or the competition demand that you always have the latest technology, a short-term lease can help you get what you need and keep your cash. Remember, cash is king!
The website of ELFA, a trade group of leasing companies, explains leasing basics. Areas covered include how to lease equipment, leasing benefits, the difference between a loan and a lease, and leasing terminology. As important, the site provides a Glossary of Terms, which can help you understand all the “buzz” words. As you begin the search for a leasing company that will fit with your needs, you will find a search feature to help.
To learn more about small business loans and leasing, contact SCORE “Counselors to America’s Small Business.” SCORE is a nonprofit organization of more than 10,500 volunteer business counselors who provide free, confidential business counseling and training workshops to small business owners. You can find a counselor online.
