Financing in a Global Economy
As business decisions go, it’s generally a better idea to lease equipment than purchase it. In fact, over 90% of Fortune 500 companies lease equipment despite their strong cash positions. Why? Because like Dunn and Bradstreet, they know that the average company earns 12% on every dollar of working capital retained in the business — so while cash should be used to increase sales, equipment is best financed through leasing companies.
The Benefits of Leasing
If you compare lease interest rates with those for conventional financing, there may appear to be no difference. But when you take into account the following benefits, you’ll see that in most cases, leasing helps you make or save money:
LEASED EQUIPMENT PAYS FOR ITSELF. A lease enables you to pay for equipment with the profits or savings it generates. Remember, it’s the use of the equipment – not the ownership – that generates profits!
LEASING IMPROVES YOUR COMPANY’S CASH FLOW by letting you buy equipment immediately and still preserve your working capital. Most leases offer 100% financing with no down payment; others furnish extended terms (up to 60 months) where bank loans are usually capped at 24 to 36 months. The longer the term, the lower the payments.
LEASING MAXIMIZES TAX ADVANTAGES. While purchased equipment is depreciated over six to ten years or longer, lease payments are fully expensed over the term of the lease – generally two to five years.
LEASE PAYMENTS ARE A PRE-TAX EXPENSE, while cash is paid with after-tax dollars. An equipment purchase of $10,000, for example, requires earnings of approximately $15,000 in pre-tax revenue. A lease can also help you avoid Alternative Minimum Tax (AMT).
LEASING PROTECTS YOU FROM OBSOLESCENCE. When current technology becomes obsolete and is disposed of before it’s fully depreciated, you lose tax credits. With a lease, you can acquire or upgrade equipment with new time and money-saving technology and not be penalized.
LEASING ALLOWS YOU TO HEDGE YOUR POSITION. Not only can you lock in your costs, you can avoid the effects of inflation and the variable interest rates associated with conventional financing.
LEASING SIMPLIFIES BUDGETING. With a known, fixed payment for the term of a lease, budget figures are easier to project. Leasing also eases budget and administrative restraints and avoids loan covenant restrictions.