New Survey---Why Businesses Lease?

National Business Institute reports a recent survey indicates the Top Five Reasons for Choosing Leasing:

1.   *41%----Cashflow---capital outlay.

2.  *18%----Rapid technological changes cause product obsolescence.

3.  *10%----Financial requirements are not as stringent.

4.  *10%----Leasing companies are more accommodating than banks.

5.  *08%----Tax implications.

#1

The tax laws with "investment tax credit" at one time favored leasing more than it does today. The IRS allows five-year depreciation on computers and eight years on software. This really is six and nine years, unless you are starting the first of the year.

A shorter lease gives a faster write-off, but most people today want a longer term. The "tax implications" are not as important as "cashflow."

Cash is needed for inventory, personnel, marketing, research and development, or just plain "working capital." Customers pay in thirty days (or longer ), so a company is always living on it’s "working capital."

#2

Profits are generated by the use of equipment. Who owns it makes no difference in that fundamental fact. And if the equipment is going to be obsolete in two years or three years, you don’t want to own it. You want to trade it up, or at least have the ability to up-grade it, if it has anything to do with computer processing speed or software.

#3

Banks like $100,000 and $500,000 transactions. The rates are also variable, although on some large SBA secured loans, the rates are fixed. Often the bank has a "working capital" loan or "accounts receivable loan" and to require more credit, the process is not only time consuming, but may affect your existing loans.

#4

Leasing companies are often more familiar with the equipment. Their niche is often not understood by other lenders (including other leasing companies). Many leasing companies take advantage of the depreciation or obtain money direct as banks due and can offer lower rates or be more liberal in their credit granting process as they have a higher loss reserve or are more active in the collection process so may be more liberal in granting credit.

#5

Leasing still has more tax incentives than any purchase of capital equipment, once you exceed the yearly allowance (around $18,000). Don’t kid yourself, cashflow is important, but getting tax benefits should be higher up than the survey indicated. Leasing is still a better tax "write-off", especially if it has a useful life of over five years.