Financing Options: Have You Considered Leasing?
As a business owner or manager, you may find yourself looking for a new source of financing. Most likely you already use short-term bank lines and you may even have some long-term debt. But have you ever considered leasing as a financing alternative?
The range of items you can lease is almost endless—from manufacturing equipment and copiers to computers, office furniture and water coolers. And leasing offers a host of advantages:
No down payment required. Leasing essentially provides 100% financing. Indeed, it may even provide more than 100%. Leases will often incorporate not only the purchase price of the leased assets but also any necessary installation charges. This can help a growing business conserve cash.
Longer, more flexible terms. While a conventional long-term loan often matures in three or five years, leases can be written for longer periods. This allows for smaller monthly payments. Even more attractive are the flexible terms that can be written into a lease.
Fixed rate of interest. When interest rates are low, leasing can be a good way to lock in a low rate for a longer period.
Reduces ownership risk. Since the lessee doesn't own the leased asset, it does not bear ownership risk. For instance, when the lease is over, a lessee does not have to dispose of the asset. At the termination of most leases, however, the company or lessee is usually responsible for returning the equipment.
Allows upgrading, avoids obsolescence. Another feature that can be incorporated into a lease is asset upgrading. This is particularly attractive when the leased assets are evolving technologically. The classic examples are computers and copiers. A lessee can sign a long-term lease for such equipment that includes an option to upgrade as new generations of these machines are introduced.
Doesn't add debt to the balance sheet. One of the most attractive features of leasing for many businesses is that it does not add debt to the balance sheet. Consequently, debt/equity ratios do not increase and debt capacity is not consumed. This can be important for growing businesses that want to maintain as much financing flexibility as possible.
So, should you lease or buy? While there are many advantages to leasing, that does not mean that it is always the right financing alternative. Each transaction must be evaluated individually.
In most cases, the crucial question is cost. In calculating the costs of outright purchase versus leasing, you must be careful to include all costs of ownership, not just the purchase price. Initially there are the costs of shipping and installation. Over the life of the asset there are also insurance, maintenance and service costs that have to be considered. Finally, there are the disposition costs: How salable will the asset be? What is a reasonable sale price? If it cannot be sold, what will it cost to have it removed and disposed of?
You must also take into consideration the tax impact of both the lease and buy options.
Need help in making the lease versus buy decision? Your Cole Taylor banker is always ready to work with you to determine the most effective means of financing for your company.
Visit the Cole Taylor website at www.coletaylor.com to learn about our financing services for businesses with under $10 million in annual sales and for businesses with more than $10 million in annual sales. You also can call us at (847) 653-7474 for more information.
In calculating the costs of outright purchase versus leasing, you must be careful to include all costs of ownership, not just the purchase price.
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