What are the advantages of leasing versus buying?Leasing offers you one more way to finance the assets you need to conduct business.
While you will not own the equipment, you will benefit from its use. For any business, the real value of equipment lies in its operation--not in its ownership. In addition, leasing offers certain benefits not typically associated with other forms of financing.
At Mid America Leasing (MAL), we deliver a full range of options that can bring many benefits to your business--it’s an excellent way to save costs, improve cash flow, avoid equipment obsolescence, free up capital and gain tax advantages. You’ll also find that leasing can simplify your life.
Pay Nothing Down
Typically, down payments are not necessary with leases. Most leasing companies simply ask for your first payment in advance. Lower up-front costs allow you to devote your cash to other areas of your business.
Benefit From Tax Advantages
A true lease structure can generate significant tax benefits. With owned equipment, the IRS allows depreciation and interest expense deductions. With a true lease, your entire lease payment can be deducted from taxable income.
Depreciation deductions for owned equipment follow a predetermined schedule. For example, the tax life of industrial equipment totals seven years. It takes eight years to write off the entire cost of the equipment. With a lease, you expense the value of the equipment over the term of the lease, usually five years. The shorter write-off period means a larger deduction each year and lower taxable income.
Lower Your Monthly Payments
Lease payments cover only the portion of the equipment value to be depleted during the lease term. A lease allows you to finance only the applicable portion of the asset’s economic life.
For example, a lease can be structured so that a new semi truck costing $100,000 may have a residual value at the end of a three-year lease of 40 percent. These lease payments cover only 60 percent of the original cost, or $60,000 plus interest. After three years, you can purchase the truck for the remaining 40 percent, or $40,000.
Improve Cash Forecasting
Lease payments can be calculated on a monthly, quarterly, semi-annual or annual basis. Once established, payment amounts and due dates never change.
Mid America Leasing offers even more flexibility. We can delay first payments, schedule payments at even or uneven intervals, and provide interim financing for larger projects. This flexibility allows you to match lease payments to your cash flow and to the profits generated by the leased equipment.
Standardize Your Replacement Cycle
With lease financing, you can replace equipment regularly. This becomes especially important for assets with relatively short economic lives, such as transportation equipment. A planned replacement cycle ensures access to reliable, low-maintenance equipment at all times.
In addition, rapid advances in equipment technology can make purchasing some equipment impractical. If you like to stay on the cutting edge or need to upgrade your equipment regularly, you should consider lease financing.
Hedge Against Obsolescence
Realistic lease terms help you avoid equipment obsolescence. When you own equipment, you bear all the risk of devaluation due to technological advances. With leasing, you can transfer all risk of obsolescence to the leasing company, because there’s normally no obligation to own equipment beyond the lease term.
Flexible lease terms give you the option to own equipment at the end of the lease, or develop replacement cycles for regular upgrades to state-of-the-art equipment. In addition, lease lines of credit allow quick reaction to new equipment needs.
Reduce Maintenance Costs
By scheduling regular equipment updates through your leasing program, you can lower your maintenance costs. Maintenance often represents the most significant expense for older equipment. As a result, many businesses get caught in a maintenance trap. Many believe it’s less expensive to add a little to the maintenance budget each year rather than to allocate a large amount of capital for new equipment. However, in time, the costs incurred by older equipment can creep far beyond the cost of replacement. More equipment simply magnifies the effect.
Besides lower maintenance expense, cost reductions may come from lower fuel consumption and reduced downtime. New, dependable equipment increases productivity and cuts time spent solving problems. You may also require fewer replacement parts when you standardize equipment and update it regularly.
Gain Convenience and Flexibility
Leasing can make your life simpler. Typically, credit approval and paperwork are quick and easy. Credit approval for smaller transactions usually takes just 24 to 48 hours. You can complete larger transactions in about a week. Leasing frees up your time, allowing you to concentrate on running your business.
You can work with local vendors to find equipment. Once you negotiate the best price, MAL steps in and takes care of the financing.
Move Assets Off Your Balance Sheet
You can decide whether a lease appears on your balance sheet. With a capital lease, you’re treated as owner of the leased equipment.
Another type of lease, the operating lease, takes equipment off your balance sheet, improving your financial ratios. Operating leases appear on your income statement as an operating expense. They are simply a footnote on your balance sheet. Off-balance-sheet financing lowers the debt to equity ratio, raises the current ratio (liquidity), and raises return on assets (ROA).
Access an Alternative Credit Source
Many organizations use a line of credit for operating purposes, and a lease for equipment. Establishing a lease line of credit for equipment diversifies your credit sources, allowing you to use all of your financing options to your advantage.
* You should consult an accountant on which type of lease is right for you.
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