Like many who are considering an equipment acquisition, you're probably very familiar with traditional financing. But learning more about leasing can give you a new lease on a healthier bottom line.
Rather than buying capital investments, leasing provides a number of cash-flow benefits. This can be especially true late in the year if you're facing Alternative Minimum Tax (AMT) or Mid-Quarter Convention penalties.
Pay for it when you need it, not after
When weighing your installment and lease options, start by asking yourself how important it is to own your equipment. With a lease, you're paying for the use of the equipment, not the equipment itself. At the end of the lease term, you can simply return the equipment to your dealer if you wish.
Leasing also allows you to keep pace with the continuous evolution of technology. The state-of-the-art machine you buy today may not be as productive or efficient as others coming on the scene tomorrow. Leasing makes it easier to stay up to date with the newest models to remain competitive, or to meet new or changing local emission requirements. And with your newer equipment, you'll experience less downtime and a reduction in maintenance expenses &mdash without retaining equipment that has outlived its peak effectiveness.
Another advantage is lower payments and less capital outlay up-front. Compared to the 10- to 20-percent down payment required on an installment loan, leasing generally requires only the first two monthly payments, which are calculated by the lender based on an assumption of how much the equipment will be worth that the end of the lease. That figure, called the residual value, is subtracted from the retail price, and the remainder is spread over the length of the lease term in monthly payments that tend to be generally lower than those on an installment loan.
In addition to keeping your cash flow more predictable with regular payments, leasing can have a positive effect on your balance sheet. In fact, under certain circumstances, leased equipment doesn't even appear on your balance sheet because it's considered neither an asset nor a liability. This can be very important to your future acquisition plans because it strengthens your financial ratios.
Returning the equipment at the end of your lease is just one option. If you decide the equipment is worth keeping in your fleet, you can buy it outright for the applicable purchase-option price, or you can simply renew the lease. It's more common, however, for contractors to add a new piece of equipment with a new lease.