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Small Business Asset Acquisition
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Did you realize that when it comes to Canadian business financing the 'lease or buy ' decision is actually an ' investment ' decision? So, whether is a business loan or an equipment lease let's look at some key aspects of leasing finance that will help the small business owner analyze the alternative you might not know you have!
THE BUSINESS OF LEASING EQUIPMENT
While various business assets can be leased, i.e. land, office, etc. our focus today is on equipment and assets. The key advantage of leasing these assets is that it allows you to free up scarce capital that you would otherwise spend in other aspects of your company... i.e. daily operations! Asset financing allows you to budget and forecast those fixed monthly payments.
UNDERSTANDING THE ' USEFUL ECONOMIC LIFE ' OF ASSETS IS KEY TO LEASING BUSINESS ASSETS
The challenge though, for the Canadian small business owner and financial manager is knowing how long you will hold the asset, and if it will have any value at the end of your usage and lease term. And because it's a lease and not a purchase you can’t make unilateral decisions to sell the asset or make a dramatic change to it. Your lessor of course has a buy-in into that decision, and the reality is they borrowed the money also and have locked in a certain yield they hope to achieve on all your lease payments. The ' end of the lease ' decisions you make significantly impact your overall success in equipment leasing and the obligations in the lease agreement.
ASSESSING THE LEASE VERSUS BUY ANALYSIS
We love talking to small business clients, or for that matter companies of any size ! about the ' lease vs. buy' decision as some are keenly aware of the key drivers in that decision, and others... are not!
THE KEY BUSINESS DRIVERS IN THE LEASE DECISION
So what are some of those key drivers? They include the actual cost of the asset, taxes, accounting treatments regarding book value, as well as making an intelligent decision around what the leasing company calls the ' useful economic life ' of the asset.
Cash flow is critical in the business owner’s final decision around the asset acquisition, but at the same time, you want to ensure that you also consider the profit-generating aspect of the asset.
WHAT IS THE COST OF CAPITAL
Many small business owners don't fully understand their ' cost of capital ', and other factors to consider are areas such as debt vs. equity, given that debt is pretty well always cheaper than reducing ownership control via equity dilution. And if your company has a reasonable amount of equity and a clean balance sheet you can achieve very attractive lease costs in today’s business financing environment.
Not all the lease / buy decisions you are faced with having to do with ‘the numbers ‘. A good example – purchasing or leasing new technologies for your employees give your company both a solid reputation and are somewhat of a morale booster. In certain cases because of government legislation, you may even be forced to lease or purchase assets you might not necessarily have wanted to... or needed. That’s our government for you... here to help ..!?!
Clearly good it’s always good to focus more so on revenue-producing assets, and in particular ones that produce sales and profits. On occasion, though the business owner finds himself or herself faced with the proverbial ‘guesstimate ‘when it comes to business asset acquisition.
THE 4 KEY FACTORS IN THE LEASE VS BUY ANALYSIS
So can we summarize some of the critical factors in the ‘leasing or purchase ‘decision? They might include:
1.Revenue and cost issues
2.Tax/accounting/depreciation/useful life issues
3.Budget constraints
4.Intangible issues re customer and employee perceptions
So, whether its 'lease or buy', or 'buy or lease' - If you’re not totally comfortable with acquiring assets under a lease/loan or purchase strategy seek out and speak to a trusted, credible and experienced Canadian business financing advisor today.
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Stan Prokop
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