You need new equipment: should you pay cash,
finance it with your bank or apply for a lease?
 
   That’s a good question often asked by companies who need new equipment but aren’t
 sure how they should pay for it. Seasoned finance experts provide some insight:
 
 
        Cash is King – especially in hard times!
 
At first, this seems like the least expensive alternative. But is it? Especially in difficult times you never have enough cash. Paying cash saves interest charges over the life of the equipment. The real cost, however, becomes apparent when you need to cover short-term cash-flow needs and your cash reserves aren’t there anymore. A good rule of thumb: use short-term resources to pay for short-term needs and use long-term resources to pay for long-term needs…such as financing telephone equipment. The right way to use cash in a business is to use it to generate gross profit and to bridge timing differences between payroll, payables and receivables. Telephone equipment is expected to provide a benefit to your company for an extended period of time. It just makes sense to spread the cash outflows ratably over that same period
 
Why not finance through my bank line of credit?
 
If cash gets tight, your bank line of credit is invaluable. In fact, the whole purpose of the line is to help you pay your expenses until the money your sales generate is collected. Try increasing the size of your line of credit while explaining that you spent the existing line on equipment needs. This would not inspire confidence from your banker. One more thing to consider is that your line of credit is most likely secured by receivables, inventory and other assets. Even if your banker wants to help you, you may be limited by the value of collateral available. Like cash, your line of credit is intended as a short-term resource: Use long-term resources to fund long-term needs and guard those short-term resources carefully. 
 
Maybe I should I ask my banker to give me
a long-term equipment loan.
 
Now you’re heading in the right direction. While this approach is better than using cash or your line of credit, it may not be the best alternative either. Banks often require a 10-20% down payment and have limits set for how much they can lend to a particular customer as a whole. Some banks don’t offer a fixed rate of interest for the whole term of the loan either. Usually, flexible structures like 90-day deferred payments, stepped payments, seasonal payments, skip payments or balloon payments aren’t available options with bank loans. Banks also have a yes-or-no mentality. If you qualify at the time you apply… great… but banks can be picky. Finally, if your bank is the only basket you are putting your eggs in, you had better safeguard it well. Having more than one finance source is simply a good business practice. You wouldn’t want to rely on only one supplier, one customer or one employee. Why rely on only one finance source?  
 
 
OK, so tell me why lease financing makes more sense?
 
For one thing, it’s another basket… a new relationship that preserves your bank lines and offers a new source of money to help your business grow. Those flexible structures we talked about are readily available through leasing.   In fact, leases offer another structure that can give you a lower monthly payment and more flexibility at the end of the lease… the so-called “tax lease”. Also known as an “operating lease”, this structure is a true rental with a purchase option. When the lease term is over, you can buy the equipment, refinance the remaining balance or simply walk away.   Many experienced business people feel what really is important is to obtain the use and benefit of that equipment while having the flexibility to upgrade at lease end. That prevents outdated equipment from continuing as a cost of doing business.
 
With a lease you can usually finance 100% of the purchase price plus the cost of installation, delivery and even the prepaid maintenance. Payments are fixed for the entire term of the lease and are a hedge against inflation: you pay in tomorrow’s dollars for the use of equipment sold at today’s prices.
 
Each method of paying has its advantages and disadvantages. 
When it comes to paying for an investment into new equipment,
leasing is the most sensible alternative.
 
 
Leo Charpentier, President of Dynamic Lease Corporation (a strategic leasing partner of more than forty equipment manufacturers and resellers) has an extensive background as an accountant, bank CFO, manufacturing CFO, business owner, consultant and teacher. He has counseled over 300 businesses and is recognized as an expert in business financial matters. Visit www.dynamiclease.com for more information.
 

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