Thursday, June 25, 2015

[VIDEO] I was invited to make a guest blog post about the reasons a business may want to lease instead of buying equipment.

This post appeared as a guest blog post:

Lease vs Loan when buying equipment for a business.

Why would a business want to lease a piece of equipment instead of borrowing money to buy it?
For me the answer is quite simple, cash (capital) is scarce.
When you lease instead of borrowing, you can usually get the equipment with a far lower or no down payment.
Why? In a leasing arrangement the lease company retains title to the goods and can more easily repossess it if you default on your payments. Because they’re more ‘secure’ they are usually willing to extend more credit.
A bank may have to go through a more difficult process to seize its collateral in a similar situation.
Leasing companies may also have better expertise in the specific equipment that they finance. This means they are better able to manage losses. Again, another reason to extend more credit than a lender might.
Another great reason why leasing makes sense is because it forces a business to recognize the cost of using the equipment as they are ‘using it up’ to generate cash flow.
I’ve seen too many situations where people have bought equipment outright with no debt. Or, they made a big down payment and amortized the loan over a period greater than the useful life of the equipment.
They end up using and retiring the equipment before they have finished paying for it!
In the case where there is no debt, companies use their better cash flow position to undercut competitors and trick themselves into believing they are making a lot of money.
What they’re actually doing is converting their invested capital in the equipment into cash without setting aside the money to replace the equipment! When it wears out they end up in trouble!
I’ve seen this particularly in trucking businesses where people with no payment make lots of profit and live a great lifestyle but end up in trouble when that truck finally needs to be replaced.
Leasing forces you to recognize the true capital cost of the equipment as you’re using it to make money.
Sometimes you can even finance soft costs such as installation with leasing.
Sometimes leases are only in the company name and don’t require a personal guarantee. This doesn’t happen with loans from the bank.
With lots of advantages, leases sometimes do cost more than traditional loans but sometimes the terms are more important than the price.
I’ve never heard of a lease getting ‘called,’ but it happens all the time with business loans and lines of credit.
Check out my books and blog at and be sure to sign up for my mailing list while you’re there.
David C. Barnett

The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback.  Sign up for my mailing list and don't miss a thing! [CLICK NOW]

No comments:

Post a Comment