Given today's economic climate and the rapid pace of technological obsolescence, more than 80% of all U.S. companies utilize some form of equipment financing according to the Equipment Leasing and Finance Association reports. Equipment financing allows companies to procure equipment at a fixed rate, for a fixed period of time, without having to purchase the equipment from cash or working capital. Leasing permits you to avoid many of the uncertainties associated with equipment ownership and instead allows you to focus on using the equipment or assets to run and grow your business.
Companies choose to lease equipment rather than purchase equipment for many reasons, including:
The preservation of cash flow compared to conventional financing is the most attractive benefit of leasing. A “true” lease can offer low cost financing because the lessor takes advantage of tax benefits that are passed to the lessee in the form of reduced payments. If the lessee cannot currently use tax depreciation to offset taxable income due to current operating losses, loss carry-forwards or alternative minimum tax, depreciation benefits may be effectively lost forever if the lessee purchases rather than leases.
An equipment lease/finance transaction in many cases can be executed and completed in less time than traditional financing alternatives.
Conservation of Capital
Leasing doesn't require the cash outlay for a large equipment purchase and can be used to overcome budget limitations. Existing cash position and lines of credit remain free and liquid for other working capital needs that have higher ROE and or ROA metrics.
Leasing provides 100% financing while a typical equipment loan requires an initial down payment. Most “soft” costs incurred in acquiring equipment can be financed by the lease. These costs include delivery charges, interest charges on advance payments, sales or use taxes, installation and training costs. Such costs are not usually financed under alternative methods of equipment financing.
A lease can be structured either on or off balance sheet. As an expense, lease payments reduce tax liability and can be structured to qualify as an operating lease under FASB 13 for financial reporting purposes. The choice depends on your accounting objective and other cost trade-offs that you are willing to make in order to achieve your strategic objectives.
Equipment Life Cycle Management
Leasing permits regular upgrades to reduce obsolescence risk with equipment life cycle management.
Improved Return on Assets
Many companies place a heavy emphasis on ROA and ROE for evaluating profitability and performance. Operating leases often have a positive effect on ROA and ROE as equipment and project costs are paid for in “cheaper” future dollars.
Industrial Revenue Bond Limits
When the costs of a plant and equipment to be financed by industrial revenue bonds are expected to exceed statutory limits, equipment can often be financed through a lease to keep the project within the bond's capital expenditure limits.