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Insights Banking & Finance

Lease or own?
How leasing equipment can sometimes be better than buying Interviewed by Matt McClellan

E
ach year, American businesses, nonprof- struggling with current and future business
its and government agencies invest over conditions; however you need to replace
$1 trillion in capital goods and software some equipment now, and could use some
(excluding real estate) of which 55 percent new equipment to accommodate planned fu-
($550 billion) is financed through loans and ture growth.
leases. In fact, 80 percent of U.S. businesses The short-term uncertainty makes it even
use leasing as a form of equipment financing. more important to run your business as ef-
Should you buy the equipment you need ficiently as possible, and have the ability to
with cash, or should you take out a loan or take advantage of growth opportunities. New
lease the equipment you need? These are the equipment in your planned capital expendi-
questions business owners are asking now tures may be critical in delivering the perfor-
that the economy is showing some signs of mance improvements you need in 2011.
improvement. New equipment often provides a tangible
“Small businesses often have difficulty rais- cash flow benefit in increased revenue, lower
ing capital — that’s no secret,” says Jeffrey J. costs or improved productivity, but these
VanCleve, president of FirstMerit Equipment cash flow benefits are derived over time. Fi-
Finance Inc. “This difficulty, among other nancing new equipment through a lease al-
reasons, has caused many to look at leasing lows better matching of future cash flow ben-
equipment as an alternative financing ar- Jeffrey J. VanCleve efits with financing payments, thus cash can
rangement for acquiring the use of assets. All President be retained in the business in these somewhat
types of equipment leasing, including motor FirstMerit Equipment Finance Inc. uncertain times.
vehicles, computers, manufacturing machin-
ery and office furniture, have become more Why is it important to keep cash on hand?
and more attractive.”
Smart Business spoke with VanCleve requires a cash down payment. A lease al- You may believe (and you wouldn’t be
about the advantages of leasing compared to lows a business to conserve cash for other alone) that if you have the cash available
the other types of purchasing equipment. strategic needs. Also, lease payments are typi- in your business to acquire necessary new
cally lower than loan payments, enhancing equipment, you should always pay with cash,
What’s the difference between a lease and a monthly cash flow. because it is less expensive than financing
loan? n Leasing improves profitability: monthly the equipment through a bank or equipment
lease expense is typically less than the com- finance company. However:
An equipment lease is an agreement allow- bination of depreciation expense and the n It is important to ensure that your busi-
ing a business to acquire and use equipment, opportunity cost of capital (with a cash pur- ness remains liquid and has plenty of cash
while conserving cash and existing lines of chase) or depreciation expense and interest available to manage through any setbacks.
credit. The customer (lessee) makes periodic loan expense (with loan financing). Lower n A business can fail because of a short-
payments to the equipment finance company financing expense means greater profitability. age of cash, even while showing accounting
(lessor) over the lease term, and the lessor n Leasing reduces risk: a lease typically profit.
holds legal title to the equipment. Leases are transfers the obsolescence risk of depreci- n Often the greatest opportunities to grow/
generally written to allow the customer to ating equipment to the equipment finance expand appear in times of market turmoil. It
purchase or return the equipment at the end company, while providing a business with takes cash to take advantage of opportunity.
of the lease term. the flexibility to either purchase or return the
On the other hand, an equipment loan is an equipment at the end of the lease term. Where can a business turn for help?
agreement advancing funds for the customer n Leasing optimizes available tax benefits:
to use to purchase equipment. The customer there are tax benefits associated with new An equipment financing and leasing special-
(borrower) makes periodic payments of prin- equipment acquisition and ownership. Leases ist can structure a financing solution that opti-
cipal and interest to the lender over the loan are typically structured to take optimum ad- mizes your business cash flow while meeting
term. The customer owns the equipment and vantage of those benefits, providing the low- your accounting and tax objectives. Interest
holds legal title; lender takes a security inter- est after-tax cost to the end user customer. rates are low and lenders are eager to help in
est in the equipment until the loan is repaid. this area. Ask your banker if you can discuss
How can leasing equipment help with your financing alternatives with their equipment-
What are the advantages of leasing? business’s cash flow? financing specialist, and keep cash as king
of your balance sheet to better manage your
Although there are many individual advan- If you are running a business, you may be business. <<
tages to leasing equipment versus purchasing
with cash or financing with debt, these advan- JEFFREY J. VANCLEVE is president of FirstMerit Equipment Finance Inc. Reach him at Jeff.VanCleve@firstmerit.com or (330) 384-
tages can be placed into four categories: 7429. FirstMerit Equipment Finance provides equipment financing and leasing solutions to a broad spectrum of industries throughout the
n Leasing improves cash flow: leasing pro- Ohio, Pennsylvania, and Illinois regions, and is among the top 100 leasing companies in the U.S. with specialized knowledge in aircraft,
vides 100 percent financing for your equip- manufacturing equipment, transportation, medical equipment and municipal finance. With a team of experienced professionals, we provide
ment acquisition, while loan financing often our clients creative lease and loan structures to meet their financial objectives.

Insights Banking & Finance is brought to you by FirstMerit Bank


94 Smart Business Cleveland | October 2010

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