There are many reasons why companies lease equipment. Business equipment leasing provides flexibility and protection against technological obsolescence; it allows a company to better match cash outflow with revenue production through the use of equipment; and it conserves valuable working capital and bank lines. Business equipment leasing is efficient, convenient, and allows for 100% financing.
Top Ten Reasons Why Companies Lease
- Purchasing Power: Equipment lease financing allows the lessee to acquire more and/or higher-end equipment.
- Balance Sheet Management: Certain types of leases help the lessee better manage the businesses balance sheet and improve the overall financial picture, by conserving operating capital and freeing up working capital and bank credit lines for inventory, expansion and emergencies. See Operating vs Capital Lease.
- 100 Percent Financing: With equipment leasing, there is no down payment. The term of the lease can be matched with the useful life of the equipment.
- Asset Management: A lease provides the use of equipment for specific periods of time at fixed payments. It assumes and manages the risks of equipment ownership. At the end of the lease, the lessor disposes of the equipment.
- Service Additions: Many lessees choose to structure their leases to include installation, maintenance and other services, if needed.
- Tax Treatment: Leasing offers the option of deducting 100% of the lease payment as a business expense. See Operating vs Capital Lease.
- Upgraded Technology: Leasing provides companies with the ability to keep pace with technology. The lessee can upgrade or add equipment to meet ever-changing needs.
- Specialized Assistance: Lessors are specialists in equipment leasing and financing, and understand capital equipment markets.
- Flexibility: There are a variety of leasing products available, allowing the lessee to customize a program to address the needs and requirements of the business. Such as cash flow, budget, transaction structure, cyclical fluctuations, etc.
- Proven Equipment-Financing Option: Over 30% of all capital equipment in North America is acquired through leasing. In fact, 8 out of 10 companies lease their equipment.
The Advantages of Leasing vs Purchase
Cash: Buying equipment has an immediate negative impact on cash flow because of the need to make one large payment up front.
Lease: Leasing has only a slight impact on cash flow because small monthly payments are made over time.
Cash: Owning equipment requires the buyer to be responsible for the entire life of the equipment.
Lease: Leasing equipment requires the user to be responsible for the equipment for just as long as he or she is using it and is in possession of the asset.
Cash: Equipment owners are responsible for tracking the asset through its entire life cycle.
Lease: Lessors frequently offer asset management services as part of the lease, transferring the responsibility for tracking the equipment to the leasing company.
Cash: The owner of equipment must manage all maintenance costs, interest, taxes, and insurance.
Lease: In many leases, the burden of maintenance, interest, taxes and insurance is managed by the lessor.
Cash: The owner bears all the risk of equipment devaluation. Obsolescence must be tracked by the owner.
Lease: The end user transfers all risk of obsolescence to the lessor since there is no obligation to own equipment at the end of the lease.
Cash: Owners must manage the disposal or selling of outdated equipment. This can slow down the upgrade process.
Lease: Leasing allows for easier upgrades, including master leases that allow for additional equipment to be acquired under original terms and automatic upgrades to new equipment and technology.
Cash: Owners must manage asset liability on their books. Financial accounting standards require owned equipment to appear as an asset with a corresponding liability on the balance sheet.
Lease: Leased assets are expensed when the lease is an operating lease. Such assets do not appear on the balance sheet, which can improve financial ratios.