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Leasing

You're probably already familiar with buying equipment, but leasing may be a new concept you haven't considered. According to the Equipment Leasing Association (ELA), a non-profit organization that represents companies involved in the equipment leasing and finance industry, leasing offers many advantages versus other financing methods (such as loans).

First, the IRS doesn't consider an operating lease to be a purchase. According to the IRS, it's actually a tax-deductible overhead expense, which means you can deduct the lease payments from your corporate income. An operating lease also isn't considered a long-term debt or liability. This means the lease does not appear as debt on your financial statement, which in turn makes you more attractive to traditional lenders, if and when you need a loan. And because lease payments are treated as expenses on your balance sheet, the equipment doesn't have to be depreciated over five to seven years. This is equal to an immediate write-off of the dollars you spend.

In leasing, there is very little money down required. Also, because a lease doesn't require a down payment, it's equivalent to 100 percent financing (which means you will have more money to invest in revenue-generating activities). Leases also offer flexibility as you grow and your needs change. You can add or upgrade at any point during the lease term through add-on or master leases (note that the ELA recommends that if you anticipate growth, negotiate that option when you structure your lease program).

For example, if you plan to continually acquire equipment, a master lease that allows you to acquire many items within a single lease (and avoid executing a new contract with every new item) may suit your needs. Leases can even be customized to fit your month-to-month or year-to-year cash flow needs; they can be customized for cash flow, budget, transaction structure, cyclical fluctuations, etc. For example, some leases allow you to miss one or more payment without penalty.

A lease provides asset management because it tracks the use of equipment for specific periods of time at fixed payments. Better yet, the lessor assumes and manages the risk of equipment ownership. Leasing also offers cash forecasting; you know the amount and number of lease payments over the life of your lease. This way, you can accurately forecast equipment cash requirements for your company. And when the lease ends there are several options for the equipment, including returning it, renewing the lease or buying the equipment.

Lastly, in an industry where having the latest technology can make or break you, a short-term operating lease can help you get the equipment you need and keep your cash. The ELA recommends leasing any equipment you think will depreciate quickly or will be obsolete soon.

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