Equipment Leasing Versus Direct Purchase and Cash Loans

By: Edwin Linares

Old time business managers would probably recommend complete ownership of all office equipment when starting a business. It was believed, at a time, that businesses should operate with zero debt and that operators are required to be able to immediately afford all tools for the trade even before they even think of venturing into business.

Times have changed. Economies have changed. Financing in the modern world has revolutionized the business owner's view on investment and cash management. Among these changes include the introduction and promotion of equipment leasing.

The approach to acquiring the necessary operational equipment like machinery, transportation, office equipment and the like is done more strategically nowadays. Business operators now try to balance liquidity of the businesses, obsolescence of equipment and overall efficiency of the business.

There are many advantages to equipment leasing. First is the conservation of capital. Through leasing, operating capital is saved for use on other profit-generating expenditures that need funding. In the tight economic environment we work amidst today, cash is required to cover expenses like marketing, research and even product development.

There is also the element of time. Acquiring an equipment lease is faster and ultimately more economical. Less documentation and qualification requirements are needed unlike bank loans that need several legal documentation, credit investigation and verification. For start up businesses, credit histories can fall short of the usual 2-3 year basis that is preferred by lending institutions.

The issue on down payment is also worthy to mention. Purchasing decisions of costly equipment are also influenced by the required down payment factor. Sometimes, a lesser quality equipment is settled for because of the initial cash outlay needed. In Finance Leasing, no down payment is required, making it easier for operators to get hold of the optimum equipment they need.

Once the equipment is obtained, there is also the matter of maintenance. In many equipment leasing arrangements, repair and preventive maintenance of the leased equipment is included free of charge. Adding up all these savings throughout the term of the lease will be quite significant.

Effects of economic trends to interest rates can largely impact adjustable rate mortgages. By availing of fixed monthly lease payments, lessees are spared from effects of inflation and will also greatly assist in business budget forecasts and allocations.

Cancellation of lease or even delay in lease payments is sometimes accommodated without penalty. This is a benefit that cannot be derived from traditional cash loans.

Another feature of equipment leasing that proves highly beneficial to any business operator is the ability to allow trade-ins or equipment upgrades. This means that the operator is not bound to the equipment beyond its active lifespan. Equipments go obsolete after some time and may need to be replaced to be up to date with technology. Leasing allows this replacement with the least cost.

Lastly, from a finance manager's point of view, leasing is better than cash loans. Because it is not considered as a debt and is actually pre-tax, leasing makes the equity-to-debt ratio much more attractive. Payments may also be written off for tax purposes.

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