Small-business owners often bring their consumer mindset to running their businesses, particularly in the early years of owning. In many regards this mindset is helpful because businesspeople can more easily think like their customers.
But this mentality can hinder progress when it comes to the idea of leasing. Most entrepreneurs want to own their stuff. That’s why they became business owners. They often think leasing doesn’t make sense for the computers, TVs and furniture in their homes, as well as the cars in their garage, so why would it make sense at their company?
What they don’t realize is that there are many advantages to equipment leasing for small businesses.
One of the most important is that access to capital for expanding or enduring a temporary downturn isn’t tied up in equipment loans. Every business has a limit to the capital it can access. If a new business ties up the majority of its lending limits by purchasing computers, software and other basic tools, then it may not have the ability to expand with another location or new equipment that might improve output or efficiency.
There can also be significant tax benefits to leasing equipment because, in many instances, the lease payments can be fully deductible against current earnings.
In addition, leasing technology-based or enabled equipment is gaining in popularity. A decade ago, most technology equipment had a useful life of five or more years; now, however, the pace of innovation means a computer or computer-driven device may be out of date within three years. If your computer equipment is leased, you will never find yourself with old, outdated equipment and with a limited ability to replace it. This isn’t true only of design firms, engineers and other creative businesses; in today’s world computers drive everything from farm equipment to the most basic manufacturing equipment.
Probably one of the most overlooked benefits of leasing rather than purchasing is what it does to a small business’ balance sheet and what that can mean as the business grows. When you lease equipment, you avoid having too much long-term debt on your balance sheet. Your equipment is part of your regular business expenses, and that’s all. For the new business owner who may think it’s dangerous to have that expense, it usually isn’t much different than the monthly depreciation expense needed for the equipment that was purchased and is now a company asset. Leasing just makes for a more attractive balance sheet, which will be needed when the successful company is ready to grow.
These benefits explain why commercial and industrial equipment leasing has grown faster than traditional bank lending since 2009. More than $1 trillion of investments in business plants, equipment and software were projected to be financed through loans, leases or lines of credit in 2016, according to the Equipment Leasing & Finance Association.
When considering a lease versus a loan there are several factors to consider. With traditionally smaller monthly payments, leasing can be a budget-friendly option if cash flow is tight or unpredictable from quarter to quarter. Leasing typically does not necessitate the same requirements for approval that a traditional loan would. If a large sum for a down payment is a concern, leasing can be a great option.
There are many other things to consider when evaluating whether to pursue a loan or lease to equip a new business, expand an existing business or simply upgrade and replace current equipment. Call your bank or a leasing/finance company so they can help you determine what option is best for your situation and business needs. Don’t discount equipment leasing without fully understanding the possible short- and long-term benefits it can offer.
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Marcus Guinn is an executive vice president and loan manager at Arvest Bank in central Arkansas. Email him at MGuinn@Arvest.com. More information on small-business planning and lending is available from the Arvest Business Resource Center at ArvestBiz.com. |