If you run an asset intensive business the decision to chose leasing vs financing your equipment can be dramatic. However you might not realize it until your business experiences a period of rapid change (expansion or contraction). Here are 3 reasons why I believe leasing trumps loans when it comes to your equipment purchases:
- Reduce Risk: Bank loans are considered ”callable debt” or “due on demand”. If the bank doesn’t like your industry sector and/or your financials they have every right to demand all their money back, usually within 90 days. Yes it happens. Leases however, (the ones sold by non-banks) are not due on demand and the only time you will have a problem is if you don’t make payments. Reduce risk by using leases.
- Preserve Credit Lines: Chartered banks are the only place businesses can obtain revolving lines of credit. Owners need to keep those lines in good standing and try to reduce use of them when their industry sector takes a negative turn (see #1 above). Equipment, on the other hand can be readily lease financed outside the bank and those leases will not affect your ability to borrow at the bank. If you want to maximize your credit lines leasing is the way to go.
- Cash Flow Matching: Leasing is the only way to structure your debt in line with seasonal or irregular income. It may be a project or contract where payment is staged or you may have a seasonal business. Step up payments, step down payments and seasonal on/off payments are all familiar tools to leasing companies that banks simply don’t offer. If matching your payments to income matters then leasing is the winner.
When you run a small business there is always risk. Smart owners seek to mitigate the risk, improve cash flow and create profit wherever they can – leasing is one trump card you can easily hold.