Lease or Loan? Learn about the options to put your business in the best financial position
Maintaining and growing profit margins requires good financial decision making. As the economy recovers, more financing options are available. Equipment Finance Industry research in 2013 reported that of the projected $1.3 trillion total U.S. investment in equipment and software, 55% would be financed through loans or leasing agreements.
Equipment leasing is almost always more advantageous for your business than a traditional loan. Here’s a quick review of how lease agreements and loans compare.
Impact on cash flow
Generally, using your leased machine will generate income that exceeds the amount of the monthly payments. This allows you to stretch the budget and lease or rent additional equipment for bigger jobs. In some cases 100% financing is available, so not even a down payment is required.
If your work is seasonal or cyclical, lease terms are available to help. Lower initial payments or deferred payments are the most common options. What’s most important is to understand exactly how long it will be from the time the machine is leased to when you will have the income in hand to make a payment.
Loans require a down payment, and you finance the remaining amount. It is not unusual for the lender to require the borrower to pledge other assets as collateral for the loan. In addition, a loan usually requires two cash expenditures during the first payment period—a down payment at the beginning and a loan payment at the end.
Impact on your available credit
Credit is a key resource for business growth. When your lease is an operating lease, leased assets can be expensed. Such assets do not appear on the balance sheet. Smart financing can preserve your lines of credit and save your borrowing capacity.
Financial account standards require owned equipment to be listed as an asset along with a corresponding liability on the balance sheet. This can limit your borrowing capacity.
Impact on your tax situation
Section 179 Deductions allow you to get the entire depreciation deduction in one year, rather than taking it a little at a time over the term of an asset’s useful life. You can take advantage of the 179 Deduction on leased equipment. The advantage to leasing equipment and/or software and then taking the Section 179 Deduction is the fact that you can deduct the full amount of the equipment and/or software, without paying the full amount this year. As of this writing, 2014 provisions have been restored to their original limits, which are much lower than 2012 or 2013 limits. Legislation is currently pending to raise these limits.
For a secured loan, you may claim a tax deduction for a portion of the loan payment as interest and for depreciation according to IRS depreciation schedules.
Explore your leasing options. Leases can be structured with or without deposits and for virtually any length of term. With end-of-term options—return the equipment, purchase or extend the agreement—you can truly customize the financing to your business. Leasing decisions are typically made quickly—in a day or two. If you have a clear picture of what will work best for you and your business, you can get to work faster.