Equipment leasing versus buying

Two questions can help you determine
whether to lease or buy equipment.
(1) How will the costs of acquiring the equipment affect our cash flow and
leverage, and (2) how long will you want to
keep the equipment?

“Knowing the answers will help lead you
down the right path,” says LaShaun A.
Coard, vice president/senior relationship
manager, Wells Fargo Bank N.A., in Houston.

“When determining whether leasing is
the best option, it’s important to consider
which type of lease product best meets
one’s needs — an operating lease or a capital lease,” adds Coard. “An operating lease
is an off-balance-sheet item. If cash flow or
leverage is an issue, you may be able to
deduct the leasing expense against current
income without showing equipment on
your balance sheet as an asset or liability.

“A good CPA will help you determine
which financial scenario makes the best
sense for your company.”

Smart Business spoke with Coard about
leasing versus purchasing.

What are the advantages of leasing?

A clear benefit to leasing is that you may
be able to acquire equipment without cash
with a lower monthly payment as compared to the payments that would be due
under a loan. All related costs, such as
delivery and set-up, may be rolled in, so it
may be a 100 percent financing option.

A lease is also an attractive option if the
equipment will not have a high residual value,
becomes technologically obsolete and/or has
a relatively short useful life, such as with
computers and other IT technologies.

Another advantage has to do with a company’s borrowing capacity. If your balance
sheet isn’t really strong, depending on the
type and residual value of the equipment
involved, a lease may be easier to obtain
because the requirements of some lessors
can sometimes be more lenient than those
of a conventional bank.

What are some disadvantages of leasing?

Overall, the expenses may be greater
with a lease, depending on the type of lease product you select, particularly if the lessee decides to purchase the equipment at
the end of the lease term. There might be
an option to purchase the equipment at the
end of the lease; if so, the amount can be
based on an assumed residual value or may
be whatever the fair market value is at the
end of the lease term, depending on how
the transaction was negotiated up front. As
with some loans, many leases have prepayment penalties or may not pre-paid at all.

What are the advantages of purchasing?

You’ll own the equipment. With regard to
high-tech equipment, such as computers
that become obsolete very quickly, leasing
may be the better option. On the other
hand, if you’re looking at heavy machinery
with a long, useful life that will have residual value, buying may be a better route.

Your overall costs may be lower by obtaining a loan to finance the purchase price
of equipment than they would be by leasing the equipment if you end up exercising
a purchase option at the end of a lease.

By owning the equipment, you avoid the
risk of having to pay an increased price to
acquire the equipment if the equipment
retains a high value, which risk you would
have in a lease transaction with a fair market value end of term option.

What are the disadvantages of purchasing?

You may have to spend money up front,
which can tie up cash. Depending on the
type of equipment, you might have to provide a 20 percent to 30 percent down payment. You also take the risk, again using the
example of computers, that there will be no
residual value when you are finished paying
off the equipment — so it will be yours to
sell, and you might not get much for it.

Do you have any money-saving tips?

First, as mentioned above, a good CPA
will determine how to structure the tax
deductions to your best advantage.

Second, if you need to make a major purchase and don’t want to spend cash up-front, another option is interim funding.
For example, an equipment manufacturer
requires a 30 percent down payment,
another third after 30 days, and final payment upon delivery. With Wells Fargo
Equipment Finance, Inc.’s (“WFEFI”) interim funding product, WFEFI can make
those payments for you, and you only
make interest payments during that period.
When you take delivery of the equipment,
the lease then begins.

What criteria should someone look for in a
lender or lessor?

Many vendors have their own leasing
deals and will promote discounts if you
lease through them. You should compare
what they’re offering as a discount to what
you can get elsewhere, taking into consideration the amount you have to pay up front,
the monthly payment, the term and the endof-term options. Ask what your commercial
banker can offer. It’s prudent to have this
type of relationship in place. If you look to
one banker to handle all your business
needs, your banker may be able to make
concessions for you. The relationship with
your banker can be as important as your
relationship with your attorney or CPA.

LASHAUN A. COARD is vice president/senior relationship
manager, Wells Fargo Bank, Houston. Reach her at (832) 723-5323 or [email protected].