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ManageMent
www.us-
tech.com Lease or Loan? What You Need to Know to Decide By William G. Sutton, CAE, President and CEO, Equipment Leasing and Finance Association A
s the economy continues to im- prove, more manufacturers are making capital investments to
fuel their growth. When business own- ers and managers consider acquiring equipment, they often think of their payment option as a “lease versus buy” decision. In any economic environ- ment, when preserving owner or shareholder capital is an important goal, financing equipment through a lease or loan will enable a business to preserve its cash.
Choosing a Financing Option Whether you finance equipment
through a lease or loan, each has its advantages. In evaluating options, it is important to look at each alternative to determine which will best balance usage, cash flow and the company’s fi- nancial objectives. To help determine the most appropriate option, consider the following questions.
10 Considerations in a Lease or Loan Decision:
1. How long will the equipment be required? Generally speaking, if the length of time the equipment is expect- ed to be used is short term (which usu-
ally means 36 months or less), leasing is likely the preferable option. Equip- ment expected to be used for longer than three years could be a candidate for either a lease or a loan.
2. What is the monthly budget for the equipment? As with any ongoing business expense, consider the monthly cost for a piece of equipment and how it fits into the budget. In general, leasing will provide lower monthly payments.
3. Will the equipment become ob- solete while it is still needed for the operation? Protection against obsolescence is one of the many bene- fits of equipment leasing, since the risk of obsolescence is assumed by the lessor. Certain lease financing pro- grams allow for technology upgrades and/or replacements within the term of the lease contract.
4. Is the equipment going to be used for a specific contract or can it be used for other projects? Often, the business objective of equipment is for it to be revenue-producing. If a piece of equipment has limited use within a specific contract and won’t be used for other projects, it’s not ideal for
it to be idle while you continue to make payments on it. It makes sense to stop the equipment expense when the in- come from it ceases, which you can do with a lease.
5. How much cash would be re- quired up front for a lease and for a loan? Leasing can often provide 100 percent financing of the cost of the equipment as well as the costs for transportation, delivery, installation set-up, testing and training, and other deferred costs (e.g., sales tax). Loans usually require a down payment and don’t include the other cost benefits. Ask how much of a down payment is needed and assess the availability and desirability of allocating company capi- tal for that down payment.
6. Can the company use the depre- ciation or would the company get a greater benefit from expensing the lease payments? The tax treat- ment of the financing arrangement is an important consideration in choosing between a lease and a loan. A loan pro- vides you with the depreciation tax ben- efit; with a lease, the lessor owns the equipment and realizes the tax benefit, which is usually reflected in a lower monthly rent payment for your busi- ness as well as the ability to expense the payment. In many instances, if your business cannot use the tax benefit, it makes more sense to lease than to pur- chase through a loan because you can trade the depreciation to the lessor in exchange for better cash flow.
7. How will a working capital facil- ity be impacted? Many businesses have an aggregate line of credit through a bank that they can use for inventory purchases, improvements and other capital expenditures. Depending on the lending covenants, it is often possible, as well as preferable, to preserve your bank working capital by leasing equip- ment through an equipment finance provider.
8. How flexible does your business want the financing terms to be? A lease can provide greater flexibility, since it can be structured for a variety of contingencies, whereas with a loan, flex- ibility is subject to the lender’s rules. If your business has continuing use for the equipment at lease termination, extend- ed rentals, purchase options, trade-ups and return options are available. The lease term allows your business to match all expenses to the term of the equipment’s use, including income tax expense, book expense and cash ex- pense. Most importantly, as mentioned previously, the expense stops when the equipment is no longer required.
9. Do you anticipate the need for additional equipment under your financing agreement? If your busi- ness is planning for growth, you can enter into a master lease that will al- low you to acquire multiple pieces of equipment under multiple schedules with the same basic terms and condi- tions. This provides greater conven- ience and flexibility than a conditional
loan contract, which must be renegoti- ated for additional equipment acquisi- tions.
10. Who can help me evaluate what’s best for my business? Whether you finance equipment through a lease or loan, each has its ad- vantages. When making the decision between a lease and a loan, it is highly recommended that you consult with your accounting professional, as well as draw on the resources of your equip- ment financing provider to enable you to secure the best possible terms for your lease and/or loan. These are some of the key consider-
ations that should go into the lease ver- sus loan decision-making process. For a lease/loan comparison and online tools, visit www.equipmentfinance advan tage - .org/ef101/
llc.cfm.
Editor’s note: William G. Sutton,
CAE, is President and CEO of the Equip- ment Leasing and Finance Association, the trade association that represents companies in the $827 billion equipment finance sector, which includes financial services companies and manufacturers engaged in financing capital goods. See
www.ELFAonline.org r.
©Equipment Leasing and Finance Asso- ciation 2014. Reprinted with permission.
Powering the Internet-of-
Things (IoT) Continued from page 10
sees the biggest growth opportunities over the next several years in IoT pow- er sources addressed by inductive and energy harvesting technologies. Induc- tive power sources, almost exclusively used in wireless chargers, represent barely a $5 million market at present. It is expected to exceed $100 million by 2018 and more than $760 million by 2021, largely due to adoption in RFID tags, an IoT segment that will surge to a $100 million market by 2019 and $583 million by 2021. The market for energy harvest-
ing power sources is expected to re- main small (about $7 million) through 2015, but then to grow to $41.5 million in 2016 with increasing wireless sen- sors/sensor networks. The IoT will help accelerate the need for energy- harvesting devices in the years follow- ing that, to $161 million by 2018 and ultimately $557 million by 2021. The growth of wearable wireless devices within that period will also contribute to the need for energy-harvesting de- vices, at a level of next to nothing at present to $82 million by 2018 and a $200 million market by 2021. Contact: NanoMarkets, LC, P. O.
Box 3840, Glen Allen, VA 23058 % 804-938-0030 E-mail:
sales@nanomarkets.net Web:
www.nanomarkets.net r
December, 2014
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