A Discussion of Cash vs. Lease

Whether you are starting a new business, expanding an existing facility, or simply acquiring new technology, the method used to acquire assets can have a profound impact on your business. Companies should carefully consider their options and the overall costs and effect on their business, before they reach for that checkbook.

Grow in strength:  It is safe to say that most businesses intend to grow in strength and scope. These objectives generally guide business decisions and define the term ‘success’.  Leasing enables companies to keep cash on hand and improve a company’s cash flow.

Proper management of cash flow: It is commonly accepted within the financial community that the most prevalent reasons for business failure are insufficient capitalization and the improper management of cash flow. If we accept those premises, paying cash for capital asset acquisitions may well have an adverse effect on a business's ability to succeed. Conversely, financing in general - specifically leasing - can be used as a very effective management tool, and enhances chances for success.

80% businesses lease:  According to the U.S. Department of Commerce, American businesses acquired approximately $580 billion in capital assets during 1997, of which approximately $180 billion were leased. Furthermore, the Equipment Leasing Association of America reports that over 80% of U.S. businesses lease some or all or their capital assets.
 
Benefit from the use of equipment:  The basic assumption that CFO's and business owners make is that benefit is derived from the use, rather than the ownership, of assets. Therefore available or excess cash is spent on things that are not traditionally financed, such as sales, marketing and personnel, while leasing is used to acquire depreciable assets such as equipment.  Many experienced business owners and managers feel equipment should be paid for as it produces revenue or saves costs. 

Retain capital strength: Leasing allows you to purchase the equipment and technology you need today, while spreading your payments affordably across time. This allows you to reserve your capital for other day-to-day expenses. In addition, because a lease is not considered a long-term debt or liability, it does not appear as debt on your financial statement, thus making you more attractive to traditional lenders when you need them.