ss_blog_claim=bd50edc517cf0b7549fe6b5f63b6b5f8 The SLS Business Finance Blog: The Basis of Equipment Leasing: Use v Ownership

Monday, December 8, 2008

The Basis of Equipment Leasing: Use v Ownership

I often get asked 'Why should I lease equipment that I need in the course of my business'?

Here is an example I often use to explain to people why:

Imagine yourself as a business owner that makes and sells widgets. This year the big widget making machine is the Widget Pro 1000 and it costs $50,000. You need this machine (or one like it) to make the widgets that you will then sell. You have 2 options:

A) You buy the equipment either with your own cash or through a loan with a bank
B) You lease the equipment instead over 3 years with a 10% Purchase Option at the end of the period

Each has advantages and disadvantages. With Option A, the overall cost is less over that same 3 year period and you get to depreciate the 50k cost over 5 yrs with one of the 3 depreciation methods previously discussed. Those are the advantages.

With Option B, you are paying a little more than a loan and thats the big disadvantage. The advantages? One advantage is every dollar of every lease payment is tax deductible, so we are not limited to the 50k purchase price. Let's see the biggest advantage though:

2 Years From Now, the Widget Pro 2000 comes out and provides 15% more output for the same cost or saves 15% for the same level of production, a significant technological upgrade. What can we do about it?

Human nature dictates that when we pay for something and own it, we want to get maximum use out of it so since there is likely 5-6 years use in the WP 1000, it means we are likely to keep it another 3 yrs even though we know better is out there? Why? Because we feel like we are throwing our $$ away if we don't. The biggest hidden disadvantage of ownership is right here, feeling like we are locked into outdated, obsolete equipment because we bought it. If you think you would make the smarter business choice of the immediate upgrade, then think about how many break/fix computer guys there are to help extend the life of computers and you know its just not true.

With a lease, we are locked into one more yr, use the purchase option to RETURN the equipment that is now outdated, and upgrade to the WP 2000 right away so we can increase output, lower our costs, or both.

So which way is really cheaper in the end?

Southern Lending Solutions

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