Leasing vs. Buying Jacksonville FL

Small equipment rental business owners often find themselves in need of new equipment such as delivery trucks and computer systems. And with the cash outlay involved, the large majority must be financed from an outside source. This outside financing need leads to a choice.

Should you lease or should you buy?

The answer depends on your financial circumstances. What we will do here is take a quick look at the attributes of leasing versus the advantages of buying.

Advantages of leasing

There is a growing trend in small business toward leasing of significant equipment needs such as vehicles. And many businesses now lease smaller office equipment like copiers and telephone systems. The advantages of leasing are:

Lower down payment requirements. Most lease contracts require little or no down payment. For an equipment rental business with little excess cash on hand, a lease might be the only viable financing alternative.

More flexibility on monthly payment requirements. Lessors are generally more flexible than banks in terms of payment requirements. When you are considering the acquisition of a new delivery truck, you can only estimate the amount of new revenue the vehicle will generate. If your cash flow is already tight, a lower monthly payment can be key.

Keeps bank lines open. Most banks maintain a credit limit for each borrower. If you finance an equipment purchase with a bank loan, it could count against your total credit availability. A lease from another financing source or even another department of the bank, however, will allow you to preserve your borrowing power.

More favorable financial position. Because leased assets and the corresponding liabilities generally are accounted for on an "off balance sheet" basis, the lease does not count against your overall debt position. This can also positively impact your relationship with your bank as well as with suppliers.

May offer tax advantages. Depending upon your overall profitability picture, the legal structure of your company and the state in which you operate, leasing might be advantageous from a tax standpoint. Consult your accountant during your lease/buy decision process to see which method will save you the most tax dollars.

Protection against obsolescence. When you lease equipment, the lessor is responsible for its disposal at the end of the lease. Often you might choose to purchase the equipment when the lease expires. But if you would rather pursue more state-of-the-art equipment at that point, you are free to do so without the hassle of having to dispose of the used piece of equipment.

Advantages of buying

Even with the increasing trend in leased equipment in small business, most major equipment acquisitions are still made through outright purchases. The advantages of buying are:

Lower interest rates. The discrepancy between lease rates and borrowing rates can be substantial. A bank typically will charge a lower rate for a loan than will a leasing company for a lease because the bank assumes a lower level of risk by requiring a 20 to 30 percent down payment. It is not unusual for lease rates to be three to five percentage points higher than borrowing rates. For example, if you purchase a delivery truck and take out a $50,000 five-year loan with a nine-percent rate, your total interest outlay during that five year period will be $12,275.07. In comparison, the total interest outlay on a $50,000, five-year lease at 12 percent would be $16,733.34. You would save $4,458.27 in interest costs over that five-year term.

A couple of points should be made here, however. Be sure and check the fee structure for bank loans versus lease transactions. In some areas of the country, banks charge minimal fees for loan origination and documentation for equipment financing. But in other areas of the country these fees can be quite substantial and would raise the effective rate you would pay to finance the equipment purchase with a bank loan. Likewise, with leasing fees that can vary greatly. You need to make sure you are comparing apples to apples on the fee structure.

Ability to depreciate the value of the asset. It was stated above that in some cases a lease will offer tax advantages. But in most situations, you will find that a purchase is more advantageous from a tax standpoint due to the ability to depreciate the value of the asset purchased. Again, be sure and consult your accountant for tax advice before you make a final lease/buy decision.

Control of the asset. As the owner of the asset, you have more control in a purchase. This provides more flexibility if you decide to sell the asset before the finance term expires.

What you will need to apply for a lease or loan

Whether you lease or buy, you will be asked to submit certain information in conjunction with your request. Here's what the bank or leasing company will want to see:

• A brief narrative history of your company with some explanation of your plans for the new equipment. If you are just starting out, preparation of a full-blown business plan is strongly recommended.
• A resume on you and other key people involved in your equipment rental business. It's important to establish management credibility and capability early in the process.
• At least three years of historical financial statements to minimally include an income statement and balance sheet. If your venture is less than three years old, provide whatever financial information you have.
• Financial projections for at least one year going forward. A simple pro forma reflecting your expectations for revenues, expenses and net profit over the next couple of years will do. The bank and/or the lease company will be looking at potential cash flow generation as the primary source of repayment.
• Information on the equipment being purchased. Either a bank or a leasing company will want to know the total cost, warranties, service arrangements, useful life and general capabilities of the equipment you are acquiring.

When to lease and when to buy?

As with most key business decisions, the lease/buy decision comes down to money. If your equipment rental business is well established with a solid working capital cushion (in other words, you've got enough in the bank for the down payment and then some) and a strong relationship with your existing bank, then you should probably take advantage of the lower interest rates and buy.

On the other hand, if your business is fairly new or if you are still recovering from a few lean years, leasing is probably the best option. Yes, leasing will probably cost you more over the long run. But if you are confident that a new delivery truck or computer system will increase your revenues, and you haven't got the down payment or the credit availability to borrow the funds for a purchase, leasing likely is the best alternative.

Money-saving tips for leasing and buying

Whether you decide on leasing or buying, there are a couple of areas to watch closely. First, make sure there are no hidden fees. Then, on the fees that are plainly disclosed, try to negotiate them down. Many leasing companies and banks offer their originators the flexibility to reduce or even waive fees.

Secondly, obtain quotes from two or three prospective financing providers before you proceed. Putting the leasing agents and/or banks in a competitive position will probably save you money on the interest rate as well as the fees.

Thirdly, if you are leasing, be sure you know what type of lease it is. A Dollar Buyout contract is the most favorable, because it allows you to buy the equipment for $1 at the end of the lease. Other lessors might utilize a Percentage Buyout contract that stipulates a certain percentage (usually 10 percent) of the original value at which you may purchase the equipment at the expiration of the lease.

An Intangible End lease is the one to avoid. This lease type allows the lessor to establish the buyout price at expiration based on largely subjective factors (such as condition, market value, replacement value, etc.) that are established by him.

A new equipment acquisition represents a major financial commitment for any small equipment rental business. Hopefully, this overview of the lease/buy decision will aide you the next time you are considering the addition of any equipment for your equipment rental venture.