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Leasing Considerations



A candid explanation of Cash vs. Credit or "Why the heck should you lease?"

 

Whether you are starting a new company or expanding an existing facility, the method used to acquire assets can have a profound impact on your business. The three most common methods of asset acquisition are:

  • Paying Cash - Although paying cash is universally regarded as the least expensive choice, you should carefully consider other options and the overall costs and effect on the business before paying cash. Cash has a "hidden" opportunity cost of not having funds available for other business uses (like advertising, etc.).
  • Bank Loans - Bank Loans traditionally offer the lowest stated APR, but Bank financing can often be dramatically more expensive when the large security deposit requirement is factored in.
  • Leasing - Leasing allows for 100% financing and can typically include all installation, delivery, and applicable tax. The lease is structured as a "rental" payment for a fixed term at a fixed monthly payment. Once the term is paid, there is typically a nominal option to purchase, conveying ownership to the customer.

Growing Pains
It is safe to say that most businesses intend to grow in strength and scope and that those objectives generally guide business decisions and define the term "success." It is commonly accepted within the financial community that the most prevalent reasons for business failure are:

  • Insufficient capitalization
  • Improper management of cash flow
If we accept those premises, then paying cash may have an adverse effect on your business's ability to succeed. Conversely, financing in general, and leasing specifically can be used as a very effective management tool and enhance your chances for success.

According to the Equipment Leasing Association of America, 80% of U.S. businesses lease some or all of their capital assets (furniture, manufacturing equipment, computers, software, fork lifts, delivery trucks, industrial shelving- if it's an expensive piece of equipment ask me). The basic assumption that CFO's and small business owners make when financing equipment is that the benefit is derived from the use rather than the ownership of assets. Therefore, available or excess cash is spent on things that are not traditionally financed such as sales and marketing, or personnel.

Consider Tomorrow
An important factor to consider when financing equipment is the potential effect on your business' ability to borrow in the future. Small business owners are sometimes unaware of the potential consequences. Most creditors and especially banks will establish a limit on the amount of credit they are willing to extend. This is simply a good and prudent business practice. The major elements used to make this evaluation are:

  • cash flow
  • credit habits
  • earnings and the general financial condition of the business under review
The general financial condition and the evaluation of assets are tricky areas. For example, if a creditor sees $25,000 in cash on your financial statement it is obvious that the asset is worth $25,000.

However, if you take that cash and replace it with a $25,000 computer system the creditor knows that the sales tax, sales commissions, shipping, warranty allocation, distributor profit and manufacturer's profit was included. The creditor is likely to reduce the value of the asset by as much as 50%. The impact of this reduction is significant. If that asset value is reduced to $12,500 and your business can borrow at six times equity, the cash purchase has effectively reduced your ability to borrow by $75,000.

It's the Economy (Again)


Another important consideration is the national economic environment (I don't think I need to say more here). However a business chooses to acquire its operating assets, it is essential to retain availability and capacity. In other words, you need cash to borrow cash. Leasing is about leveraging capital because business growth is rooted in the ability to have choices and to take advantage of opportunities when they present themselves.

We invite you to explore the range of options we can provide to you. Please contact us directly if we can be of any assistance.