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Weigh pros and cons of leasing vs. buying equipment

One of the most irritating decisions a fast-growing company needs to make is whether to lease or buy capital equipment that is necessary to sustain the company's growth. Part of the frustration with this decision is that the conclusion is not a "one time fits all" answer.

Most of us turn to our accountants who are trained to know these kinds of things. Unfortunately, many accountants will answer from a total cost standpoint rather than from a cash perspective. In a start-up, cash is king and must always be a primary consideration in making any de-cision.One of the biggest reasons one must revisit the issue of leasing vs. buying is that the answer changes as your business changes while it moves along the growth curve. Another factor is the sources of capital available at the time you need the equipment.

Here are some pluses for leasing if your company is in either the start-up or growth stages.

1. No use of current working capital. Leasing allows you to use your cash for other critical purposes, such as payroll, expansion, hiring needed personnel, retiring loans, etc.

2. Immediate write-off of the dollars spent. Therefore, equipment does not have to be depreciated over five to seven years.

3. Very little money down. Perhaps only the first and last month's payment is due at the time of the lease.

4. A hedge against inflation. If you wait until you have the money to buy the equipment, the price may rise. Leasing at today's prices will allow you to pay with tomorrow's dollars.

5. Leased equipment doesn't show up as an asset or an off-setting liability.

Therefore, it is transparent to the balance sheet.

6. If you lease, your credit lines will be intact, allowing you to borrow for expenses that can't be worked as installment payments.

7. Leasing will allow you to walk away from the equipment at the end of the lease by returning it to the leasing company, or, if you wish, you may purchase it at market value for a pre-negotiated, used price.

8. Leasing allows you to always plan to have the latest and greatest equipment in your operation. With planned obsolescence by many manufacturers today, leasing allows you to always be trading up.

9. You are always getting the best and most trouble-free years of usage of the equipment.

10. Unlike many types of borrowing, the leased equipment may be all the collateral you need to begin using the equipment.

11. Leasing equipment allows for more flexibility in this ever-changing business environment. If you change product lines or even the type of business you are in, you aren't stuck with the no longer needed equipment.

Now to satisfy my many readers who are accountants, here are some good reasons for purchasing equipment:

1. There is a first-year expense IRS election that allows for up to $18,500 of the equipment cost to be deducted in the year of purchase. This is an election that can be made each year as you need more and more equipment. You could borrow the money to buy the $18,500 worth of equipment and write it all off, even though the loan isn't paid yet. (Beware! You can't use this election for automobiles.)

2. Borrowing money to buy equipment may be less expensive than leasing. The leasing company has their profit margin built into the lease.

3. Watch your cash balances. If some cash is sitting idle, consider using that cash to buy equipment instead of leasing.

4. Consider buying up to $18,500 of equipment each year and leasing the rest.

That way, you can take maximum advantage of income tax deductions.

5. If you have an investor who has available funds, you may be able to save money by borrowing from him/her. Then, you can purchase the equipment and still keep your credit lines intact.

No one ever promised these decisions would be easy, but at least you know most of the factors needed to reach a correct conclusion.