I am asked on a consistent basis by customers what the benefits of leasing are and how leasing differs from a loan with their bank.  There are many differences and it is important to understand them before deciding what payment/finance option is the best for your company when looking to acquire equipment.  Here are some of the main benefits to equipment leasing:

Conservation of Working Capital:

With an equipment lease, you get 100% financing so the amount of cash needed up-front is reduced. Even if you have the cash to purchase your equipment it may not always be the best choice. With equipment leasing, cash can be used for other business uses such as expanding sales, new marketing programs, quantity discounts, increasing inventories, opening a new line of business, or simply cash reserves.

If you decide not to lease, you will have to come up with the entire amount for a cash purchase OR a sizeable down payment as well as higher payments for traditional financing.

Preservation of Credit Lines:

A lease preserves bank lines of credit for working capital, seasonal requirements, other appreciating investment opportunities, or emergencies. Equipment leasing is like opening an additional line of credit.

Better Terms and Structure than Banks:

Most bank loans require larger down payments, compensating balances, additional collateral, or restrictive covenants. They may not be as flexible in their payment schedules and may tie the financing to a floating interest rate. Equipment leasing has fixed payments, flexible schedules, low down payment, and does not require extra collateral.

Off-Balance Sheet Financing:

Larger companies often have a need to maintain certain debt-to-equity ratios or comply with debt covenants. Operating leases do not show on the balance sheet as liabilities and the equipment is not counted as an asset, thereby keeping the ratios unaffected.

Tax Advantages:

Operating leases are generally treated as fully deductible direct operating expenses, which means a lower taxable income. In addition, equipment leasing can be a tool to avoid certain negative impact of the Alternative Minimum Tax. Your tax professional should be consulted to determine what percentage of other types of leases could be deducted.

Leasing Provides Sales/Use Tax Deferral:

With a purchase, sales tax must be paid in full at the time of purchase. With (most types of) equipment leasing sales/use tax is paid over time as the equipment is used (except in Illinois, Maine, New Jersey, and the District of Columbia). This can result in substantial cash savings in the first year of the lease.

Hedge Against Inflation:

With the lower, fixed-rate payments of an equipment lease, you’re protected against inflation. With equipment leasing, cash outlays are deferred as compared to an upfront purchase. Inflation will then lessen the cost of future lease payments, since the payments will be made with “cheaper” dollars. You will be making your monthly payments to the leasing company with ever-inflating dollars during the term of the lease. This actually reduces the cost of financing to you in real dollars, which is an advantage that is often overlooked.

Maintains Owner’s Equity:

Many companies in a growth phase sell stock to raise money for expansion. A well-conceived lease program can allow a company to grow while minimizing the need for equity financing.

Facilitates budgeting:

Equipment leasing simplifies accounting procedures and eliminates depreciation scheduling. A fixed lease cost ensures consistent control over equipment expenditure.

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