+ machines for manufacturers
+ tech equipment for tech companies
+ vehicles for service companies
+ fixtures and warehouse equipment for retailers
Increased investments often bring increased efficiency but alas, come with a cost that requires capital and the question, should I lease or should I buy? One should first review of series of factors to decide the course of action to evaluate the best alternatives.
Budget
You’ll want to budget the amount of cash flow available for the capital program, whether the cash for the capital assets are subject to seasonality. Is the capital program a one-off, or a series of purchases of assets? Will the new capital assets help reduce expenses and help mitigate some of the cash requirements of their purchase due to less maintenance, greater productivity, etc. That may help make more cash available in the long run.
Financing
A company can use its’ cash or existing line of credit to purchase capital assets. Leasing requires less cash up front. However, check any loan convents just to ensure that your existing senior lender will permit if a very large lease – not a great risk but always part of due diligence. In addition, leasing almost always results in lower monthly payments than an outright purchase as one is only paying for the asset during the lease term vs. buying or financing the entire purchase price.
Leasing Sources
Bank leasing programs, using your existing lender can be easier and faster since they know your business. Leasing companies often can have flexible terms, especially if the cash flow is seasonal. Equipment manufacturers (captive lessors) – generally will only lease their own products but often a great deal because they have incentives to sell their products.
Tax Treatment
The standard disclaimer applies… always consult with your tax advisor. Leasing often offers more deductions faster than an outright purchase, especially when the company’s purchases exceed the Section 179 Expense election amounts for Federal tax purposes.
Analyzing leasing v. buy determine the best source of financing, and factoring the tax advantages can help a business make a better decision about how to spend capital to generate the best return on their investment to help the business grow.