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 user 2003-08-25 at 10:09:00 am Views: 169
  • #3829
    Primer: Pros and Cons of Leasing Equipment
    Source: Service Corps of Retired Executives

    Equipment leasing is one way a small business can avoid tying up large amounts of capita. All types of machinery, equipment, furniture, computers and vehicles can be leased from or through banks, commercial finance companies or leasing firms.

    It is true that equipment lease payments may be lower than a payment-for-purchase. However, over the life of the lease, you will generally end up spending more than the equipment’s original purchase price than if you had bought the item outright. However, the resulting available cash from avoiding numerous debt payments in fixed expenses can help improve the cash flow of a business.

    One drawback to leasing is the loss of the tax benefits that accrue from the capital depreciation of major items such as buildings, major equipment, computers and vehicles. An owner who purchases such items can depreciate their declining value on successive tax returns, and thereby reduce the tax burden for the business.

    However, you must look closely at lease rates. Lease rates may be low enough to offset tje future loss of depreciation value, since the leasing organization has the advantage of making volume purchases that result in a reduced price on the equipment at the beginning of the lease. In some cases, the lease payments may eventually total less than if the equipment was purchased outright. although this is likely to be a rare occasion.

    For small businesses that use computers, there are many benefits to leasing rather than purchasing a computer system. For example, if there are major improvements in a computer system during the period of the lease, the business owner may be able to upgrade by merely changing the terms of the lease. Even though the unit price of computers has dropped over the past few years, a computer system is still considered a major purchase. This is an item that can be depreciated.

    The small business that owns its equipment can sometimes arrange a sale or lease-back agreement. Under this type of agreement, the small business sells its equipment to a bank, finance company or leasing firm at a price near current market value. The buyer then leases the equipment back to the firm, which continues to use it until it needs to be replaced.