The Clash over Lease vs Cash in 2013
By Kevin F. Clune, CLP
“Thanks for your call to solicit our leasing business but we have an SBA Loan and a 3.88% Line of Credit from our bank”, was the response from a recent sales call to one of our current leasing customers.
If businesses can finance equipment in this manner, why do leasing companies exist? While every situation is different, this comment does raise an often asked question: Under what circumstance would this customer choose to lease vs. pay cash?
1.Preservation of bank lines & cash reserves
2.Hedge against obsolescence
3.Balance sheet management
4.Tax treatment advantages
5.100% Financing & a much quicker process
In our current economy, money is cheap and it is tempting to draw down on a line of credit or use cash reserves for an equipment acquisition. However, a bank line is typically meant to be used for operational needs such as meeting a payroll and absorbing the normal ebbs and flows of business. The bank intends the line to have a fluctuating balance, and as such, is not normally meant to be used for equipment purchases.
An outright purchase of equipment that is subject to obsolescence may leave you burdened with equipment that keeps you from being competitive. A Fair Market Value lease is structured to allow a business owner the use of equipment for a defined period of time and then the option to upgrade to the latest technology, renew the existing lease, or either return or purchase the equipment.
Additionally, a lease is not usually considered as a liability on a business balance sheet. This treatment results in a more favorable financial statement, thus making you more attractive to traditional lenders when you need them.
Certain leases are considered as a tax-deductible expense, which allows a business to deduct the lease payments from corporate income. Also, The American Taxpayer Relief Act of 2012 provides Section 179 Tax advantages and accelerated depreciation on equipment that is purchased or acquired with a qualifying lease, and placed into service before December 31, 2013. Clune has developed a tool to calculate your tax savings but suggests that you confirm this result with your tax advisor.
Lastly, the ability to finance 100% of the equipment cost and get the entire transaction done in minutes rather than days is an advantage over traditional loans which might require a large deposit and involve delays in processing loan papers. With today’s fast paced world, the need to promptly have equipment may affect your service and result in lost business.
This customer is not unusual in our current financial circumstances in that they decided it was best to use cash or bank lines to acquire necessary equipment. However, this is the exception, not the rule. Most businesses still prefer not to tie up lines of credit by acquiring equipment.
Kevin F. Clune, CLP
Clune & Company
