YOUR COMPANY IS LOOKING FOR ASSET FINANCING – UNDERSTAND YOUR LEASING VERSUS BUYING OPTIONS!
SOLVING THE BUY VS LEASE EQUIPMENT CHALLENGE
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Leasing versus buying. It's one of the classic questions faced by business owners and financial managers when they are looking for asset financing strategies that make sense in capital acquisition of business assets. Let's examine how you as a business owner or finance manager can make the right decisions when you are at the proverbial fork in the road, the classic ‘lease vs. buy' scenario.
Part of the reason we're intrigued by this subject is simply the fact that there is so much misinformation around there, in some cases, it's just an issue of not knowing what questions to ask.
OWNING EQUIPMENT OR FINANCING ASSETS?
Our clients at 7 Park Avenue Financial will often ask why might choose to lease an asset versus outright purchase. Good question! Companies who elect to simply pay for an asset outright obtain ownership and use of the asset. Along the way, they are depreciating the asset and taking advantage of the expense deduction that comes with that depreciation. However, in today's very fast-paced world many companies clearly might be missing out on many other significant advantages of asset finance.
IS CASH STILL KING?
The most obvious advantage in a world where cash is king has never meant more - Pandemics included is the conservation of cash. Knowing a low monthly lease payment fits into your asset acquisition budget allows you to acquire assets to grow sales and profits and even if a down payment might be required your cash outlay is still far better in the long run. For companies that are capital intensive or who require to constantly upgrade certain assets or technology that's important when it comes to an equipment lease.
Along with that those lease payments of course can also be a legitimate tax deduction. As noted, we can't overemphasize the fact that no business in today's globally competitive economy wants stranded assets on their books that have obsolescence issues attached to the asset or assets. That might be computers, software, rolling stock for your fleet, or shop floor assets in your production processes. Leasing machinery is a solid financial tool for manufacturing type companies, and leased trucks are a huge part of the transportation and logistics industry.
The computer industry might offer the best example of managing the obsolescence factor of an asset, as technology can easily be returned, upgraded, payments extended, or assets returned and replaced.
While no one doubts the concept of ' pride of ownership ' that same control can be exercised with smart lease financing options if you invest time in understanding some of the terminology and methods around capital and operating leases.
Your firm's ability to invest in new equipment whether its plant or office assets or even telecom and computing needs typically bring you to the decision point to lease versus buy. You know that with these new assets your firm can most often become more productive and profitable.
The reality is, we think, is that it's as important a decision on buying and financing those assets as it probably was as to which asset to purchase, from which vendor, and at what price.
Your ability to match the right amount of financing capital with the use and term of the asset should be key to your decision.
The term lease itself, as simple as it might seem, is actually part of the confusion around the leasing versus buying decision. Many business owners think that there is always an ultimate obligation to return the asset at the end of the lease term - similar to the consumer leasing an auto. That is categorically not the case.
UNDERSTANDING THE TWO TYPES OF LEASE OPTIONS
In reality, you have the basic choice of entering into two types of leases in the Canadian business leasing industry - a capital equipment lease or an operating lease. The capital lease is a basic lease to own scenario, no obligations there. Other than to make your payments! The operating lease gives you the right to return the asset if you choose, but it is not an obligation, it’s actually one of three choices you have under the operating 'fair market value' lease. You can return, extend, or buy the asset.
The operating lease vs capital lease option decision will usually come down to the type and use of the asset, and in some cases, the size of the transaction may come into play.
HOW ARE LEASE PAYMENTS CALCULATED -
The lease payment formula always comes down to 5 key factors -
Term of the lease
Interest Rate
Amount being financed
Monthly payment
End of the term value
If you know any 4 of those you can easily figure out the 1 unknown with the use of a financial calculator or online lease calculator.
The beauty of the operating lease is that it gives you all sorts of flexibility, has a lower monthly payment, and puts you in charge of the final asset several years down the road at the end of the lease term. This type of lease is perfectly suited for telecom and computing assets.
ARE YOU DEALING WITH THE RIGHT EQUIPMENT LEASING COMPANY WHEN FINANCING BUSINESS EQUIPMENT?
Many business owners and finance managers are often confused about their dealings with lease companies. We can commiserate with that because it's a question of which firm to deal with, what are their credit policies, which assets do they prefer or not prefer to finance and are they easy to do business with when it comes to documentation and ongoing correspondence and relations during the term of the lease.
It's at this time when it might be best to focus on working with an expert who already has the knowledge and relations within the industry to best serve to represent your needs.
We continually encourage clients to view a lease financing and asset finance company in the context of developing a long term relationship. The right type of firm will actually help you put together one Master lease and set up a lease line of credit, allowing you to quickly and efficiently add on assets at any time with minimum work. The bottom line, it’s not complex. Knowing the basics of an equipment finance lease allows you to negotiate maximum flexibility and achieve the best interest rate/interest rates.
SUMMARY OF THE KEY BENEFITS OF LEASING
The key benefits of leasing, versus buying always stay the same. There are tax advantages, preservation of capital, and minimum down payments and certainly, usually, no outside collateral required. The asset being financed is the collateral!
CONCLUSION- LEASING EQUIPMENT VS BUYING
Although lease financing might cost more in certain cases business owners and financial managers should not eliminate leasing and asset from their acquisition strategies. The issues around outlay of cash, accounting benefits, and the flexibility derived from the risk of obsolescence are worthy of consideration in any lease vs buy decision process.
Speak to a trusted, credible and experienced Canadian business financing advisor on the asset finance capital strategy that works best for your firm - and trust us, it's not as complicated as you think!
