To Lease or Buy Equipment

As the economy continues to improve, more construction businesses are making capital investments to fuel their growth. When business owners and managers consider acquiring equipment, they often think of their payment option as a “lease versus buy” decision. In any economic environment, when preserving owner or shareholder capital is an important goal, financing equipment through a lease or loan will enable your business to preserve its cash.

Whether you finance equipment through a lease or loan, each has its advantages. In evaluating your options, it is important to look at each alternative to determine which will best balance usage, cash flow and your financial objectives. To help determine the most appropriate option, consider the following questions:

1. How long will the equipment be required?

Generally speaking, if the length of time the equipment is expected to be used is short term (36 months or less), leasing is likely the preferable option. Equipment expected to be used for longer than three years could be a candidate for a lease or a loan.

2. What is the monthly budget for the equipment?

As with any ongoing business expense, consider the monthly cost for a piece of equipment and how it fits into your budget. In general, leasing will provide lower monthly payments.

3. Will the equipment become obsolete while it is still needed for the operation?

Protection against obsolescence is one of the many benefits of equipment leasing because the risk of obsolescence is assumed by the lessor. Certain lease financing programs allow for technology upgrades and/or replacement within the term of the lease contract.

4. Is the equipment going to be used for a specific contract or can it be used for other projects?

Often, the business objective of equipment is for it to be revenue-producing. If a piece of equipment has limited use within a specific contract and won’t be used for other projects, it’s not ideal for it to be idle while you continue to make payments on it. It makes sense to stop the equipment expense when the income from it ceases, which you can do with a lease.

5. How much cash would be required upfront for a lease and for a loan?

Leasing can often provide 100 percent financing of the cost of the equipment, as well as the costs for transportation, delivery, installation set-up, testing and training, and other deferred costs (sales tax). Loans usually require a down payment and don’t include the other cost benefits. Ask how much of a down payment is needed and assess the availability and desirability of allocating company capital for that down payment.

6. Can the company use the depreciation or would the company get a greater benefit from expensing the lease payments?

The tax treatment of the financing arrangement is an important consideration in choosing between a lease and a loan. A loan provides you with the depreciation tax benefit; with a lease, the lessor owns the equipment and realizes the tax benefit, which is usually reflected in a lower monthly rent payment for your business, as well as the ability to expense the payment.

In many instances, if your business cannot use the tax benefit, it makes more sense to lease than to purchase through a loan because you can trade the depreciation to the lessor in exchange for better cash flow.

7. How will a working capital facility be impacted?

Many businesses have an aggregate line of credit through a bank that they can use for inventory purchases, improvements and other capital expenditures.

Depending on the lending covenants, it is often possible, as well as preferable, to preserve your bank working capital by leasing equipment through an equipment finance provider.

8. How flexible does your business want the financing terms to be?

A lease can provide greater flexibility because it can be structured for a variety of contingencies, whereas, with a loan, flexibility is subject to the lender’s rules.

If your business has continuing use for the equipment at lease termination, extended rentals, purchase options, trade-ups and return options are available. The lease term allows your business to match all expenses to the term of the equipment’s use, including income-tax expense, book expense and cash expense. Most importantly, as mentioned previously, the expense stops when the equipment is no longer required.

With the current low-interest-rate environment, now is a good time to finance equipment, in general, through a lease or loan. Again, the benefits of the type of financing is dependent on a number of variables and not necessarily the economics alone.

9. Do you anticipate the need for additional equipment under your financing agreement?

If your business is planning for growth, you can enter into a master lease that will allow you to acquire multiple pieces of equipment under multiple schedules with the same basic terms and conditions. This provides greater convenience and flexibility than a conditional loan contract, which must be renegotiated for additional equipment acquisitions.

10. Who can help me evaluate what’s best for my business?

Whether you finance equipment through a lease or loan, each has its advantages. When making the decision between a lease and a loan, it is highly recommended you consult with your accounting professional, as well as draw on the resources of your equipment financing provider, to enable you to secure the best possible terms for your lease and/or loan.

These are some of the key considerations that should go into the lease versus loan decision-making process. Find a lease/loan comparison and online tools.

Equipment Investment Expected to Grow 6 Percent in 2015

Investment in equipment and software is expected to grow 6 percent in 2015, driven by a steadily improving economy, according to the Annual 2015 Equipment Leasing & Finance U.S. Economic Outlook released recently by the Equipment Leasing & Finance Foundation. Overall in 2015, the outlook for 12 individual equipment and software verticals tracked in the report is mixed, with some sectors outperforming others. The Foundation’s report, which is focused on the $903 billion equipment leasing and finance industry, forecasts 2015 equipment investment and capital spending in the United States and evaluates the effects of various industry and external factors likely to affect growth over the next 12 months. The report will be updated quarterly throughout 2015.

William G. Sutton, CAE, President of the Foundation and President and CEO of the Equipment Leasing and Finance Association, said, “The Association’s Monthly Leasing and Finance Index reports new business volume is up, the Foundation’s Monthly Confidence Index shows industry confidence is solidly positive, and this Outlook for 2015 projects continued steady growth in equipment and software investment. Equipment investment has been relatively modest in recent years, but picked up in 2014 and now seems poised to maintain this momentum into 2015. Overall, these trends portend a positive result for the equipment finance industry and U.S. economy.”

Highlights from the study include:

    • The U.S. economy is poised to have a breakout year in 2015, with growth expected to top 3%. Key “bright spots” that bode well for above-average growth include a rapidly improving labor market, increased access to credit, lower oil prices and fiscal healing. Meanwhile “wild cards” that could hinder growth include potential political gridlock, weakness in the global economy and geopolitical risks.
    • The steadily improving economy will likely drive solid equipment and software investment growth in 2015. Continued improvement in the economy should gradually loosen credit constraints and increase credit demand as businesses and households gain more confidence in the economy.
    • Equipment and software investment increased 9.3% in Q3 of 2014 after expanding 9.6% in Q2. Although these growth rates are unlikely to be sustained in the coming months, growth is still expected to be 5.9% in 2014 and remain relatively strong at 6.0% in 2015.
    • The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, which is included in the report and tracks 12 equipment and software investment verticals, forecasts the following equipment investment activity:

  • o Agriculture machinery investment could see continued moderate declines over the next three to six months.
  • o Construction machinery investment should moderate over the next two quarters.
  • o Materials handling equipment investment growth may experience some moderation over the next three to six months.
  • o All other industrial equipment investment will likely remain strong over the next three to six months.
  • o Medical equipment investment growth is expected to be little changed over the next two quarters.
  • o Mining and oilfield machinery will likely slow or potentially experience negative growth in investment over the next three to six months, given recent declines in oil prices.
  • o Aircraft investment growth is expected to remain relatively stable over the next three to six months.
  • o Ships and boats investment will likely see little change in the next two quarters.
  • o Railroad equipment investment should moderate over the next three to six months.
  • o Trucks investment is expected to be little changed over the next three to six months.
  • o Computers investment will likely experience relatively stable investment over the next three to six months.
  • o Software investment will likely see a slight moderation in growth over the next three to six months.

The Foundation produces the Equipment Leasing & Finance U.S. Economic Outlook report in partnership with economics and public policy consulting firm Keybridge Research. The annual economic forecast provides a three-to-six month outlook for industry investment with data, including a summary of investment trends in key equipment markets, credit market conditions, the U.S. macroeconomic outlook and key economic indicators. The report will be updated quarterly throughout 2015.

Download the full report.