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The Pros and Cons of Equipment Leasing for Small Businesses

A boat floats in the water while someone in the foreground holds a map. Beside the map, it reads "Attention Small Business Owners. Explore the pros and cons of equipment leasing."

You probably have never thought about it (we had not) but there are a ton of business phrases that originate from our ancestors’ nautical era. Back in the day when business exploits were often done by boat, the phrases used on those junkets have wormed their way into our everyday business conversations.

For example, as a business owner, you’re absolutely the captain and you definitely want to travel as the crow flies. Without a lot of good planning and better management, you could end up in dead waters.  

Because we love finance, (and because one of our own crew is an avid sailor), we are going to give you this blog chock-a-block with nautical phrases AND with super information on the pros and cons of an equipment lease finance solution. We really do want you to run copper-bottomed and you need good information to plot your course, especially if you want to run a tight ship. 

Pros of Equipment Leasing

  • Lower Upfront Costs:  Unlike a loan (and definitely unlike paying cash), equipment leasing offers a golden opportunity to acquire new gear or upgrade your existing gear without digging deep into your treasure chest. Instead, the lease allows you to finance 100% of the asset in most cases, keeping your valuable capital hoarded away for future use. Affordable payments over a reasonable repayment schedule (customized to your cash flows) mean you can keep on an even cash-flow keel. Leasing is the secret to securing necessary equipment while keeping your budget afloat.
  • Paying for the Asset as It Drives Revenue: In the days when His Majesty needed sailors, a tavern goer might find a coin in the bottom of their ‘free beer’ – which also meant they had accepted payment from the crown and owed them some service. In other words you’re going to sea, matey.

Not fair, right?  Well, if you’re using your valuable cash to buy something that has rendered no service yet, there are two things that work for you:  

  1. Why pay up front, when paying as you go using a lease means you get an ROI while the asset is helping you make money
  2. When you pay for tomorrow’s growth in today’s dollars your dollar cost average your spending (in short, that’s simple inflation busting) 
  • Greater Flexibility in Equipment Selection: Equipment leasing puts you at the helm of choice. Let’s face it, in a race to discover new land, having the ability to choose the most powerful ship your money can buy can give you a significant tailwind. This advantage is achieved by leveraging your cash or your ability to access credit to gain a competitive advantage. If you’re limited to only spending the cash you have on hand, you’re limited to what that money can buy at that or your business realities, at that point in time. We have seen many clients turn the corner by investing in better, newer equipment, rather than suffer the downtime and unpredictability of lower cost, used assets. IN short, the lease propels you into prosperity. 
  • Tax Benefits: One of the most thrilling aspects of equipment leasing is the luster of tax advantages (well, if you’re a bean-counting landlubber anyway). For many asset types, when you contrast the cost of leasing with other purchase methods, leasing helps defer future taxes (meaning you keep more money in your jeans now). While every business’ situation is different, comparing your options AFTER tax is a smart way to get ahead, hand over fist. 
  • Predictable Monthly Payments: Sailors hate a dead calm – but business owners, not so much. Calm waters offer predictable conditions, and leasing is the calm waters of your financial planning every month. No sudden storms or rogue waves to rock your boat.

Cons of Equipment Leasing

  • Higher Overall Costs: If you’re running your business lean (i.e. tiny or no profit margins), a lease might end up costing you more in the long run than paying cash would.  While a lease does offer tax advantages, if you’re not paying any tax because you’re not making any money, the value of the lease benefit is diminished. 
  • Lack of Ownership and Equity: When you choose to lease, remember that ownership and equity aren’t something you’ll have with the equipment you choose, until the lease has been paid in full. The lease company retains title to those assets as security for the financing (the bank does too, but on paper, that asset is yours). While leasing offers flexibility, if you need immediate ownership, the lease may not be the right choice.
  • Potential for Lease Restrictions and Fees: Read the fine print, and avoid unwanted surprises. Penalties for early termination and limitations on customization are two restrictions you’ll have to keep in mind. Watch out for the terms and conditions, negotiating when necessary – you and your chosen lender should NOT be like ships passing in the night. Know the obstacles and terms, that goes for ANY financial product as what the contract says is ultimately what will be true. 

Identifying Businesses that Benefit from Equipment Leasing

Industries requiring specialized or rapidly evolving equipment often choose leasing because they want the flexibility of frequent upgrades. Startups and businesses with limited booty—err, capital—can also find solace in the flexibility, up front lower costs and if they’re growing quickly, tax and other capital conserving benefits of leasing. 

Factors to Consider When Deciding to Lease or Buy Equipment

As you weigh the options before you lease or purchase for your small business, consider these factors first:

  1. How sophisticated is your treasure counting team? If your finance team is small and their resources limited, having a lease might be a better choice. Leases generally do not require your finance team to manage covenants or lending criteria on a monthly or annual basis. A lease is fixed– as long as you make the payments. 
  2. How frequently do you make changes in your equipment?  If you’re the captain who sets ashore at every new port and is always swapping gear, a lease might not be optimal for you. If you keep your gear a bit longer and primarily do planned equipment purchasing, a lease can be a great ally.
  3. How experimental is the contract or work you’re trying to service with the new equipment? If it’s a trial rather than a long-term strategy,  you may want to find a temporary (short term) rental solution and make your final decision when you have proof of concept. A lease is an obligation that is more difficult to exit – you are committed to the full value of the lease payments in most cases, even if you decide after a few months that it’s just not working out as you had hoped.  And no one wants to be plank-bound with a creditor right behind you. 

Choosing an Equipment Leasing Company

When searching for an equipment leasing company experience counts. Navigating a finance business over time and through all kinds of weather means that their account managers are going to provide you with good advice based on many years of experience with clients like you.

 Here are some tips to help you find the right company for your business:

  • Seek reputable companies with a proven track record; the best ones are like a  lighthouse – they are going to be focused on helping you, not helping themselves.
  • Carefully examine the terms and conditions of the lease agreement for hidden surprises that may lurk beneath the surface. Make sure you have whatever was promised in writing from the actual end lender. 
  • Use your negotiating skills, seeking the best terms that align with your business’s needs. Are custom plans available? Can you match payments to your cash flow across the year? Is the company focused on learning about your business, or are your choices all kind of looking the same? 
  • Last and not least –change is inevitable no matter how good you are at charting the course. Who is available to help you when you need to trim the sails? How do you make changes if you need to? Choose a leasing company that understands your industry and offers tailored solutions not just at the beginning, but throughout your lease experience.

With the right leasing company as your first mate, you’ll confidently navigate the seas of equipment leasing.

You’re now armed with a lot of great information for your voyage (and a great repertoire of nautical terminology – feel free to pass it on!) 

Remember, each business is unique, and what works for one may not work for another. Carefully weigh your options, considering your financial situation, equipment needs, business goals and risk tolerance. 

AND….. fear not, for Prime Capital is always ready to join you on your daring quest. With our expertise and our entrepreneur-first solutions, we would love to be your trusted first mate.

Contact Prime Capital today and set sail with confidence toward a brighter future.

How leasing equipment works for you.

Leasing isn’t rocket science. It’s simply another way to pay for the assets you need that keep your business moving.

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You want the best options possible. Tell us about your business and we’ll connect with you to confirm your needs and suggest solutions.

You know what equipment will work best for you. We’re great at coordinating with your suppliers and making the process as smooth and as quick as possible.

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