It has always been a good sound business practice to keep a healthy cushion of cash on hand at all times. When credit markets are tight it is especially important to keep cash reserves available for unexpected opportunities and to preserve credit line availability for emergencies.
Financial consultants and accountants commonly agree that leasing is the most effective use of operating capital. Leasing lets you acquire equipment with a fixed, affordable monthly payment, leaving credit lines and cash reserves free for business development opportunities or unexpected expenses.
The following table illustrates how leasing compares with traditional financing based on several major criteria.**
| |
Lease |
Cash |
Bank Loans |
Credit Lines |
Upfront Cost |
Minimal, typically only 1 or 2 advance monthly payments are required. |
110% - 120% of equipment cost due to tax, freight, installation, etc. |
20% - 30% down payment typically required
of 25% of the cost. |
1% - 2% of the availability on the LOC + additional fees for non-utilization. |
Repayment Term |
Highly flexible 2 – 7 year terms with custom payment plans. |
None
|
Inflexible payment plans normally with 3 – 5 year maximum terms |
Variable since LOC’s are callable (can be due on demand) and annual renewal is not guaranteed. |
Effect on Credit / Future Borrowing Ability |
Does not hinder future borrowing ability. No personal credit reporting. |
Could hinder future borrowing ability due to reduction in liquidity. |
Bank loans normally encumber all assets with a blanket lien which significantly impacts credit & borrowing ability. |
Using credit line to purchase fixed assets reduces available credit & limits future borrowing ability. |
Effect on Operating Capital |
Low upfront cost preserves working capital. |
Immediate loss of working capital due to large cash outlay. |
Immediate loss of working capital due to down payment. |
Immediate loss of credit availability due to utilizing short term LOC. |
Accounting
Treatment |
Payments can be 100% tax deductible. |
Cumbersome depreciation records. Purchase is capitalized and depreciated by IRS MACRS chart. |
Lengthy amortization schedules with complex short term / long term debt calculations. |
Cumbersome depreciation records. Purchase is capitalized and depreciated by IRS MACRS chart. |
Payments |
Typically higher due to lower upfront costs. |
None |
Typically lower due to higher upfront costs & cross collateralization. |
Variable / Unpredictable |
Tax Benefits / Tax Impact |
Accelerated expense deductions / write offs. |
None |
Deductions are typically lower due to IRS depreciation rules. |
Deductions are typically lower due to IRS depreciation rules |
Speed of Approval |
1 – 3 days depending on dollar amount. |
Instant |
Could be several days or several weeks. |
Could be several days or several weeks. |
Financial Statements |
Typically not required unless the dollar amount exceeds application only limits. |
None |
Typically required regardless of dollar amount requested. |
Typically required regardless of dollar amount requested. |
Equipment Obsolescence |
Leasing is often times the only hedge against obsolescence. |
No hedge – you own the equipment. |
No hedge – you own the equipment. |
No hedge – you own the equipment. |
Used Equipment |
Acceptable as long as the value is in line with the price. |
None |
Strict requirements may only allow new equipment purchases. |
Strict requirements may only allow new equipment purchases. |
** Every company / situation is unique so it is always wise to consult with a tax professional or your accountant to determine the best option for your company.
