To better manage operating expenses and cash flow, many business choose equipment financing.
With the many different funding options available for your businesses, don’t overlook the importance of equipment financing.
What is equipment financing?
- An equipment lease (operating lease) provides an affordable alternative to purchasing your required equipment compared to using a bank loan or another financing solution.
- An operating lease is a lease whose term is short compared to the useful life of the piece of equipment; for example an ultrasound machine which has an economic life of 8 years or more may be leased to a medical practice for 3 years with the operating lease.
- The equipment is leased for a monthly fee for an agreed period of time. At the end of the lease term the equipment can be returned, or purchased at a pre-agreed price where the rent payments count towards the purchase price.
- Credit Preservation - A lease is not a loan. Borrowing reduces lines of credit. Leasing is a new credit source, increasing borrowing capacity.
- Capital Conservation - When capital is conserved by leasing equipment, it can be put to more profitable company uses (increasing inventories, expanding sales, etc.).
- Includes Acquisition Costs - Your lease payments can also include the costs of delivery, installation, software, and other service charges.
- Financing is Off Balance Sheet- Leases may sometimes be treated as off balance sheet debt which can enhance financial ratios & borrowing capacity.
- Minimize Obsolescence - Structured leases can allow upgrade and trade-up options insuring the latest technology.
- Tax Benefits - Lease payments can sometimes be treated as a direct expense, which allows the equipment to be paid for w/ pre-tax dollars. Bank financing only allow expensing the interest costs & depreciation.
- Flexibility - Leasing provides fixed rate financing with specifically structured terms to accommodate the needs of each and every company. These structured leases include step-up, step-down, deferred, and seasonal payment plans.
Businesses lease equipment because leasing represents the best use of their financial resources. This often increases productiviy since they can utilize newer equipment. Using older outdated equipment is often more costly to run and less productive placing you at a competitive disadvantage.
Please consult with your Accountant or Tax Advisor. It is important to keep in mind:
- Your company’s specific needs as they relate to future growth
- How long you want to use the equipment
- What you intend to do with the equipment at the end of your lease
- Your tax situation
- Cash flow