Equipment Leasing – Pros and Cons

07Apr07

The biggest misconception that business owners have about business credit is that you can’t get credit if you are a new business or if you have never established business credit.    Often this misunderstanding is the reason that they will resort to using personal funds or personal guaranty’s when applying for credit.

The solution is creative financing.  

This simply means that rather than seeking funding in the form of a loan or line of credit and then using the cash to meet the need, the owner will apply for credit in an alternate form. 

A perfect example is equipment leasing.  Similar to cash loans, these credit accounts are often reported to the business credit bureaus and become  a positive part of your business credit report. 

  Compared to purchasing your equipment, here are some benefits to leasing:

1. All types of machinery, equipment, furniture, computers and vehicles can be leased from or through banks, commercial finance companies or leasing firms.
2. Do you use computers? If there are major improvements in a computer system during the period of the lease, the business owner may be able to upgrade the system by merely changing the terms of the lease
3. Equipment lease payments are often lower than a payment-for-purchase.
4. The resulting available cash from avoiding numerous debt payments in fixed expenses can help improve the cash flow of a business.

Another major benefit is that at the end of the lease you have a several options. 

You can structure your lease so that when you make your last payment:

1. You pay a minimal amount (often $1 ) and then you own the equipment;
2. At the end of the lease you pay the current market value and then take ownership;
3. Renew your contract and upgrade to a later model piece of equipment;
4. If you are ready to purchase your equipment, turn in the leased product and purchase a later model.

There two disadvantages to leasing that you should be aware of:

1. Over the life of the lease, you will generally end up spending more than the equipment’s original purchase price, if you had bought the item outright.
2. The loss of the tax benefits that accrue from the capital depreciation of major items such as buildings, major equipment, computers and vehicles. An owner who purchases such items can depreciate their declining value on successive tax returns, and thereby reduce the tax burden for the business.

 Next, I’ll give you a list of questions that you should ask before signing your lease.

To your growth & success,

DaJuan

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