To Lease or to Buy?

Here is an article on Leasing from Business Wire.

Association survey of the Small Business Administration’s State Small Business Contest winners, 86 percent lease equipment, for reasons that range from budgeting and establishing consistent cash flow to the ability to upgrade equipment more frequently.

However, although equipment can be leased to handle needs in almost any industry, many small to mid-sized business owners are unsure how to determine whether this option is right for them.

Common types of leases

“Most business owners believe they need to own their equipment,” says David Wolf, CEO of Hennessey Capital Leasing. “But it’s worth noting that the benefit of many assets derives from use, not from ownership, making the financial implications the most important consideration.”

Wolf adds that leasing provides greater flexibility in financing options for asset acquisitions and business expansion. “Every situation is unique, so the key is trying to find the right structure to fill that particular need.”

The two most common lease arrangements are capital leases and operating leases. A capital lease, which Wolf refers to as a “loan in disguise,” allows the lessee to depreciate the asset and write off the interest, while avoiding a large down payment. Capital leases appeal to businesses that ultimately plan to own the equipment but prefer to preserve their banking relationships and working capital for other ventures.

On the other hand, operating leases can be an ideal option for companies that regularly upgrade equipment. Operating leases provide a hedge against obsolescence: the ability to return the equipment to the lessor at the end of the term. This frees the lessee from any obligation and can facilitate the upgrade process. These leases also tend to yield lower payments and are expensed, so they don’t appear on the balance sheet as long-term debt. One of the most attractive features of an operating lease structure is the tax benefit, which allows the lessee to write off the entire amount of the lease payment. “In capital intensive industries, it can make a lot of sense to structure something as an operating lease,” says Wolf.

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