Equipment leasing is one way a small business can avoid tying up large amounts of
capita. All types of machinery, equipment, furniture, computers and vehicles can be leased
from or through banks, commercial finance companies or leasing firms. It is true that the
equipment lease payments may be lower than a payment-for-purchase. However, 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. However, the resulting available cash
from avoiding numerous debt payments in fixed expenses, can help improve the cash flow of
a business.
One drawback to leasing is 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.
However, you must look closely at lease rates. Lease rates may be low enough to offset
this future loss of depreciation value, since the leasing organization has the advantage
of making volume purchases that result in a reduce price on the equipment at the beginning
of the lease. In some cases, the lease payments may event total less than if the equipment
was purchased outright. Although this is likely to be a rare occasion.
For small businesses that use computers, there are many benefits to leasing rather than
purchasing a computer system. For example, 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. Even though the unit price of computers
has dropped over the past few years, a computer system is still considered a major
purchase. This is an item that can be depreciated.
The small business that owns its equipment can sometimes arrange a sale or lease-back
agreement. Under this type of agreement, the small business sells its equipment to a bank,
finance company or leasing firm at a price near current market value. The buyer then
leases the equipment back to the firm, which continues to use it until it needs to be
replaced.
Assistance is available to help you evaluate the benefits of leasing vs. purchasing.
Your accountant and tax advisor are both good sources of information. In addition, you can
call upon the SCORE Association (Service Corps or Retired Executives) for free and
confidential business counseling on this and other strategic and operational business
issues. SCORE’s business counseling is offered as a community service. More than
12,000 volunteer, business counselors assist more than 250,000 entrepreneurs each year.
For a referral to the SCORE chapter nearest you, call 1 (800) 634-0245.
