The simplicity of paying cash for equipment with no interest, no debt and no payments, lures even the most astute business person – especially when there is a peak in the cash flow. But beware. The sudden loss of cash can cost much more than just the amount of the check. Before paying cash for equipment, consider these eight reasons why leasing may make better business sense.
1. Save money on equipment. Adding equipment when cash is available undermines the benefits of equipment planning. The best equipment prices may not be available at the same time as the cash. If equipment is purchased prematurely to coincide with cash availability, the cash stops earning returns, and idle equipment contributes nothing to the bottom line.
2. Match lease payments to cash flow. Leasing allows organizations to use just a small amount of the cash available at peak times to make lease payments and keep the rest of it working for them. A variety of options allows payment schedules to match the most uneven cash flow patterns. There is no need to take on a payment schedule that will be difficult to meet
3. Pay only for the value of the equipment you use. Paying cash for equipment requires a cash outlay for the full value of the equipment. Lease payments amortize only the value of the equipment used during the lease. Low lease payments match the actual cost of equipment to the revenue it generates.
4. Win the battle with inflation – The nature of lease structures delays the need to use cash until the future. That means that equipment acquired at today's lower prices is paid for with the less valuable dollars of the future. There is no down payment, and no major cash outlay at the beginning of the lease. A present value analysis comparing a lease with a cash purchase will show that the actual dollars used to make future payments and exercise the purchase option, are virtually discounted by the inflation rate.
5. Maximize tax benefits. When leases are structured correctly, the entire lease payment is tax deductible as compared to only depreciation deductions when equipment is purchased with cash. Leasing usually provides for a larger deduction and a faster write-off, depending upon the type of equipment and the lease term. Talk to your accountant or tax advisor regarding the tax benefits.
6. Free up capital. When equipment is leased, available cash can be directed to other profit-generating purposes rather than exchanged for a depreciating asset. Cash could have more earning power when used for non-leasable items that enhance the organization’s profits. Leasing can even provide more cash when needed by releasing capital that is already tied up in equipment through a sale/leaseback. In a sale/leaseback, customers sell equipment to the leasing company for cash and lease it back.
7. Enjoy investment returns. Cash invested in equipment is gone when the asset reaches the end of its useful life. Cash invested in an appreciating asset provides many future returns.
8. Lease to own. Leased equipment is no different than owned equipment. It works just as hard, produces just as much, and you can buy it at the end of the lease if you desire. It's just another way to arrange your cash and equipment assets to bring you the best return you can get.