Cash & Loans:
- Buying with Cash can immediately affect cash reserves. Loans also require significant down payments.
- Liquid Assets can be depleted, and credit is affected.
- Owners must have asset-liability on their books. You must have equipment appear as an asset with a corresponding liability on the balance sheet.
- Additional Costs such as installation, training, software, and materials will come out of pocket.
Leasing:
- No Down Payment Required. Leasing has less impact on cash flow because of low monthly payments.
- It does not affect your line of credit.
- Operating lease assets are expensed. Such assets do not appear on the balance sheet, which can help improve your financial outlook.
- Additional Costs like maintenance, installation, and training can also be included in the lease.
Benefits of Leasing:
- 100% Financing - Leasing covers 100% of the equipment cost with room to add soft costs, including installation and maintenance.
- No Down Payment - A security deposit equal to two months' rental payments is usually all that is required.
- Flexibility - Customize a lease to fit your particular situation with special programs like deferred payments or seasonal payments.
- Use Inflation to Your Advantage - If you pay cash for equipment, you pay with today's dollars at today's value. Through leasing, you pay with next year's inflated dollars, the next, and so on.
- Preserve Bank Credit Lines - Leasing doesn't affect your bank borrowing limits. So you still have 100% of your credit available.
- Avoid having Obsolete Equipment - Upgrading your lease is easy. In addition, you can upgrade to new modern equipment.
- Conserve Working Capital - Keep your cash flow free; don't tie up cash. Keep it free for incoming producing investments.
- Leases May have Accounting Benefits - Monthly payments may be deductible as operating expenses rather than accounting for the equipment as an asset.
Tax Savings
- Possible Tax Savings* - If a company is in the 34% tax bracket and has a lease with a monthly payment of $500, the payment may be reduced to $300 - that's a monthly savings of $170 or $2,040 annually.
- Increase Your Profits Immediately - With leasing, you only need to cover the monthly payment for new equipment to be profitable from the first month! Example of cost-effectiveness of a lease: A monthly payment of $500 divided by 30 days = $16.67! Divide that by eight workday hours, and you get an hourly cost of $2.36.
Types of Leases
$1.00 Buyout or Lease to Own: This non-tax lease allows the customer to own the equipment for $1.00 at the end of the lease. This lease will have the highest monthly payment. The following options are available at the end of the lease;
- Purchase the equipment for $1.00.
- Upgrade the lease - This is a good option for equipment with a long useful life. Also called a Capital Lease and may be depreciated on the balance sheet.
10% Purchase Upon Termination: Under this non-tax lease, the customer must purchase the equipment at the end of the lease at 10% of the original equipment cost. These options are at the end of the lease:
- Purchase for 10% of the original cost.
- Upgrading or renewing a lease is known as a Capital Lease and may be depreciated on the balance sheet.
Fair Market Value (FMV): This lease provides the lowest monthly payment and has three options at the end of the lease:
- Purchase the equipment for fair market value.
- Return the equipment.
- Upgrading or renewing a lease is a good option for companies that upgrade to new equipment every couple of years. Also known as a Tax ' True Lease because it qualifies as a tax-deductible business expense.
For more information, call Danny Stewart at 714-985-6214 or email Danny at: Danny.Stewart@providencecapitalfunding.com
