Leasing vs. Buying

The acquisition of capital equipment by any business involves a myriad of important decisions. While considerable management time is expended with the key tasks of assessing need and the selection of equipment, the question of how to pay for the new equipment is equally critical.

Increased production, efficiency and accurate forecasting are all positive results of equipment leasing. Accordingly, equipment leasing has always been a competitive alternative to direct equipment purchasing. However, since 1986 the benefits of leasing have only intensified. Prior to the Tax Reform Act of 1986 there were large investment tax credits for business that purchased their capital equipment. But, in 1986 the Federal Government eliminated these credits and businesses responded by expanding their use of leasing as a means of satisfying ongoing capital equipment needs. Thus, leasing has taken on a far more prominent role as a method of acquiring equipment.

Leasing creates efficiency through the planned replacement and updating of equipment. In addition, leasing also allows for more accurate forecasting. Management does not have to play “guessing games” about the production capacity of older equipment. Unscheduled maintenance requirements, breakdowns and the lack of replacement part availability can destroy carefully planned production goals. As managers scramble to fulfill client orders with undependable equipment, costs rise and customers loose patience. Leasing allows for the premeditated replacement of equipment before it becomes obsolete or maintenance intense. The scheduled exchange of unreliable equipment for up to date equipment by lease is an invaluable tool for forecasting analysts. New reliable equipment allows for the accurate and detailed forecasting of manpower needs, raw material requirements, energy demands and production capacity.

Leasing offers additional advantages over ownership. As most leasing arrangements involve 100% financing, businesses can acquire more and/or better equipment than would be available under traditional purchase alternatives, including purchase financing. Most traditional equipment purchase financing requires companies to make deposits or down payments which can equal or even exceed 20% of the equipment cost. This depletes the business’s available working capital. As working capital is depleted, companies are restricted in the amount and type of equipment they can acquire. Leasing avoids this entirely as the equipment’s acquisition costs are borne by the Lessor and working capital is released for other business needs.

In making a decision whether to lease or own equipment, businesses often consider that one of the benefits of equipment ownership is the realization of some return upon the resale of the equipment. Yet, the uncertainty of resale value and the hidden costs of equipment disposition can turn this apparent “benefit” into a liability. In the modern business world, technical innovation is on a record pace and today’s “state of the art” equipment is often tomorrow’s “junk.” Accordingly, owners of equipment face a real risk that they will not be able recover a sufficient return from their obsolete equipment on its resale.

Equipment resale can be costly and time consuming. As most companies are not in the business of reselling their equipment, they will have to either retain expensive outside equipment experts, or assign the resale task to unprepared in-house personnel. Under either situation, there are hidden costs in reselling the equipment as large commissions will have to be paid to outside experts or in-house personal lack the market sophistication to obtain “top dollar” on resale. Under an equipment lease, the Lessee has no uncertainty of resale value or the cost of a resale. Those risks are placed on the Lessor.

Though the benefits outlined above are substantial, equipment leasing offers these additional potential benefits:

• Avoids replacement indecision;
• Increase productivity;
• Equipment is never obsolete;
• Equipment is used for the most productive segment of its useful life;
• Monthly rental payments are lower than the straight financing;
• Enhances Balance Sheet cosmetics;
• Improves operating ratios.

Whether you decide to lease or buy your equipment, CSK Leasing can offer a variety of financing products to meet your business needs.

CSK Leasing disclaims the accuracy of the information listed in this website as such information is based on generalized or hypothetical circumstances. The information in this website should not be applied to any specific situation nor considered financial, legal, accounting or tax advice. All users of this web site are strongly cautioned to consult their own financial, legal, accounting and tax professionals regarding the topics listed in this web site.