Eight Reasons Why Businesses Lease Information Technology Equipment
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"Leasing can actually give a business more purchasing power than when using either cash or bank loans." |
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Author: Scott Hinsperger, Alliance Financing Group Inc.
It is estimated that over 80% of all businesses in North America use leasing to acquire some or all of their equipment and machinery. In particular, Information Technology equipment is an ideal asset to lease. Here are just some of the reasons why:
Capital Preservation
Leasing lets a company conserve its working capital, allowing it to allocate cash funds for other purposes. Cash tied up in fixed assets is no longer available to finance important profit generating areas such as inventory, production, marketing, research and development, etc. In addition, with a lease, Sales Tax and other Taxes are not paid up front at the time the asset is acquired; but rather are remitted with the monthly payments over the life of the lease.
Credit Preservation
All businesses have access to limited credit lines at their bank. Operating lines, demand loans, mortgages and other term facilities must be kept within the bank's total exposure limit for that business. By using a third party leasing company to finance IT equipment acquisitions, a business is effectively opening new credit lines – credit lines which normally require no down payments, and no outside collateral – while preserving the businesses existing (and future) bank borrowing ability.
Easier Budgeting
Lease terms, payment streams and purchase options can be tailored to meet most budgets. Skip leases, Step-Up or Step-Down payment leases are also available to match a business' seasonal or anticipated cash flows. In addition, because most leases are based on fixed rates the customer is not at risk due to interest rate fluctuations.
Financial Efficiency
The revenues (or cost savings) generated by the use of new IT equipment can be used to pay the lease payments. Expenses are matched to the generated revenues – a sound business management principle.
Flexibility
In addition to tailored payment streams, leases can be designed with different types of purchase options. Moreover, leasing IT equipment allows for easy upgrades, add-ons and trade-ups.
Tax Deferral
Leasing may provide certain tax benefits for a business. Of course, business owners should consult their tax and legal advisors for advice on the potential tax benefits of leasing.
More Purchasing Power
Leasing can actually give a business more purchasing power than when using either cash or bank loans. Here's how: by purchasing IT equipment with cash or borrowed funds, sales and other taxes are generally paid up front. Thus, if a business had $100,000 available cash or bank loan, they could only purchase approximately $86,950 worth of equipment, as the other $13,050 would go towards payment of taxes (assuming a sales tax rate of approximately 15%). Further, in the case of bank loans, generally the bank will only finance a fixed percentage of the total cost of the equipment; requiring that the business provides equity into the transaction, in the form of a cash down payment towards the difference.
Financing of “Soft Costs”
Computer software, installation, freight, initial set-up costs, and many other initial costs associated with an IT equipment acquisition can generally be included in the cost of a lease, subject to certain limitations. This helps to significantly reduce a business' initial cash outlay.
About the Author : Scott Hinsperger is executive vice-president of Alliance Financing Group Inc., a leading Canadian provider of small business financing solutions. He has 10 years experience in the Leasing and Financing industry and six years in Franchise Consulting and Development, primarily focused on the small to medium-sized enterprise (SME) market.
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