The slowdown in the economy has had a dramatic effect on the amount of money small businesses are choosing to invest in office equipment. After nearly nine years of significant increases in capital spending, 2001 will mark a year of decreased investment.
Equipment leasing offers a flexible and practical solution for many small businesses. Leasing results in a smaller upfront investment but a higher cost over the life of the equipment.
However, with interest rates at historic lows and the potential tax savings, leasing is an increasingly popular option for small businesses.
Reaping the benefits
A small business can lease virtually any type of equipment on a variety of terms, including office furniture and fixtures, communications systems, computers and software, and manufacturing, transportation, construction and medical equipment. Some of the benefits include:
* Tax advantages. The IRS does not consider an operating lease to be a purchase, but rather a tax-deductible overhead expense. The leasing company will often pass the tax benefits of ownership on to the lessee in the form of lower monthly payments.
* Expense vs. debt. Leasing is not considered a long-term debt or liability and does not appear as debt on a financial statement, which can make businesses more attractive to traditional lenders. Additionally, leasing payments are treated as expenses so equipment does not have to depreciate over five to seven years.
* 100 percent financing. With leasing, there is little or no money down, which means businesses have more money to invest in revenue-generating activities.
* Flexibility. As needs change, small businesses can add or upgrade equipment at any point during the lease term through add-on or master leases. That option, as well as the inclusion of installation, maintenance and other services, should be negotiated when the lease program is structured.
* Customized solutions. A variety of leasing products is available to tailor a program to fit month-to-month or year-to-year cash flow needs. Businesses can customize a program to address their needs and requirements, such as budget, industry trends and cyclical fluctuations.
* Up-to-date technology. By leasing equipment, small businesses keep cash while acquiring equipment. For equipment that depreciates quickly, a short-term lease enables the business to reduce the risk of having obsolete equipment and allows for technology upgrades and equipment additions.
* Speed. Leasing can allow businesses to respond quickly to new opportunities with minimal documentation and red tape. Many leasing companies can approve applications within one or two days and deliver equipment quickly.
* Improved cash forecasting. A lease provides the use of equipment for special periods of time at fixed payments, enabling businesses to accurately forecast cash requirements.
* Flexible end-of-term options. There are several options for disposing of equipment after the lease term ends, including returning it, renewing the lease or purchasing it.
Deciding factors
There are a wide variety of leases available to small businesses. The typical lease ranges from 24 to 60 months, with monthly, quarterly or annual payments. A company’s tax situation, the type of equipment being acquired and the lifespan of the equipment can help determine what type of lease may be most appropriate.
* A lease line allows companies to make payments to equipment vendors before entering into a lease for a specific amount of equipment to be delivered in the future. A single master lease eliminates the need to negotiate agreements for each individual piece of equipment.
* An operating lease is a type of tax lease that meets certain financial reporting criteria and has terms that are shorter than the expected useful life of the equipment. An operating lease is popular for high-tech equipment that becomes obsolete quickly and is not shown on a company’s balance sheet.
* A capital lease provides the lessee with equal, fixed payments over the term of the lease and allows for a transfer of title for the equipment to the lessee at the end of the term for a bargain price, such as $1.
* With a true lease, the lessor is the owner of the equipment, which is attractive when leasing equipment with frequent technology upgrades, such as computers. This structure must meet certain IRS criteria and can offer small businesses a low monthly payment as well as tax deduction benefits.
* In a sale-leaseback, the lessor purchases the equipment and leases it to the company, which continues to use the equipment. This type of lease is an effective way for small businesses to free up additional financial resources.
Clearly, leasing can be tailored to meet the needs of an individual small business. A small business should decide whether to take advantage of the option to lease rather than buy office equipment with an eye toward its short- and long-term business plans.
At Fifth Third, we encourage small business owners to make the lease or buy decision as they would approach any other important business decision: Ask questions, weigh the options carefully and seek professional guidance as necessary.
Timothy Mauter is vice president of the Equipment Financing Department for Fifth Third Bank. He can be reached at 341-2697 or [email protected].
