Stuff: Your business needs it, but you don’t want to break the bank to get it. Coincidentally, it’s the bank that can be your best friend when it comes to getting the equipment needed for your business to be successful.
No matter what kind of equipment your business relies on — transportation, IT, construction, agriculture, medical — when something breaks down, or it’s time to upgrade, the price tag can be overwhelming. Especially for small businesses.
Some people’s first thought is to go ahead and start planning to break the piggy bank to purchase outright, or to finance through a traditional loan structure, which can put a serious strain on a business’ cash flow. However, instead of purchasing equipment, I often recommend to people a different financial approach: equipment leasing.
Buying equipment with cash on hand might make sense in some situations, but leasing that same equipment can bring benefits business owners aren’t aware of, or might have overlooked. It’s important for business owners to know their options. Here are some benefits of leasing equipment for your business.
First, any initial down payment will, of course, be less than the total cost of the equipment. This immediately reduces cash outflow. Keeping more cash on hand to operate the business is an extremely important aspect for startup or young businesses. As you’re starting out, it’s important to have funds available for unknown situations, and to fund growth.
Second, some lease payments can be tax-deductible business expenses. If you own the equipment outright, there would be annual depreciation expenses. When a business owner uses cash for equipment purchases, they are paying for that equipment with post-tax dollars (essentially adding those taxes to the sales price of the equipment).
Leasing equipment may allow an owner to use pre-tax dollars and classify that expense as a deduction against revenue before taxes. Because the leasing company retains ownership of the equipment during the long term rental agreement, the owner can write of the lease payment as an expense. Always consult a tax adviser in these situations.
Next, the lease approval process is usually relatively quick, and the amount of paperwork may be less than what is required for a business loan. Terms for leases may be more flexible than those under traditional equipment loans. Traditional loans usually are much more rigid in structure, while leases can offer many payment options, such as seasonal or skip payments, low to high payment options, or residuals. A leasing representative may have more options in structuring a plan and payments in a way that is favorable to your business’ cash flow.
Finally, an option to purchase at the end of the lease gives the business the right — not the obligation — to purchase. No business wants to end up owning a piece of obsolete equipment. It’s also important to know that another benefit of leasing equipment is that professionals will evaluate the equipment for the business owner. There’s no need to be an expert about the equipment in order to know the exact value of it. Some lease terms may allow periodic upgrades to the equipment, so the business owner can benefit by getting the most up-to-date technology.
Leasing equipment not only can be a smart alternative for your business, it also is growing in popularity. According to industry analyst IHS Markit, growth in investment in equipment and software is expected to grow 3% in 2017, and by 2020, total investment in equipment and software could reach $1.8 trillion.
Clearly the secret is getting out.
Editor’s note: Eric Bunnell is a certified lease & finance professional and president for Arvest Equipment Finance, a division of Arvest Bank, in Fort Smith. The opinions expressed are those of the author.