Whether you are starting a new business, expanding an existing facility, or simply acquiring new technology, the method used to acquire assets can have a profound impact on your business. Companies should carefully consider their options and the overall costs and effect on their business before they reach for that checkbook.
Grow in strength: It is safe to say that most businesses intend to grow in strength and scope and that those objectives generally guide business decisions and define the term ‘success’. Leasing enable companies to keep cash on hand improve a company’s cash flow.
Proper management of cash flow: It is commonly accepted within the financial community that the most prevalent reasons for business failure are insufficient capitalization and the improper management of cash flow. If we accept those premises, paying cash for capital asset acquisitions may well have an adverse effect on a business’s ability to succeed. Conversely, financing in general, specifically leasing can be used as a very effective management tool and enhance chances for success.
80% businesses lease: According to the U.S. Department of Commerce, American businesses acquired approximately $580 billion in capital assets during 1997 and approximately $180 billion were leased. Furthermore, the Equipment Leasing Association of America reports that over 80% of U.S. businesses lease some or all or their capital assets.
Benefit from the use of equipment: The basic assumption that CFOs and business owners make is that benefit is derived from the use rather than the ownership of assets. Therefore, available or excess cash is spent on things that are not traditionally financed such as sales, marketing and personnel, while leasing is used to acquire depreciable assets such as equipment. Many experienced business owners and managers feel equipment should be paid for as it produces revenue or saves costs.
Retain Capital Strength: Leasing allows you to purchase the equipment and technology you need today while spreading your payments affordably across time. This allows you to reserve your capital for other day-to-day expenses. In addition, because a lease is not considered a long-term debt or liability, it does not appear as debt on your financial statement, thus making you more attractive to traditional lenders when you need them.
Lower Initial Cost: If you wish to buy a piece of equipment that costs $20,000, and you are in the 28% tax bracket, the total pre-tax revenue needed to pay for the equipment would be $27,777.78. While you could deduct for the depreciation over several years, you are depriving yourself of capital that could be better used. Studies have shown that the average company in the U.S. earns about 12 percent per year on every dollar of working capital retained in the business. Paying $20,000 for this piece of equipment can cost you $2,400–or more–per year in lost opportunity cost. Retain your highly liquid capital for more dynamic problems such as large orders, payroll, expansion, and unforeseen incidents.
Higher Rate of Return: Quite simply, the value of equipment to your company is defined as the benefits of it divided by its cost. In the first year of ownership of a piece of equipment, it would be harder for it to live up its expectations if you have paid $40,000 cash for it. With leasing, you only have to worry about the first year’s payments, so the equipment becomes a benefit right away.
Tubes n’ Hoses International has partnered with SLS Financial Services, in order to give our customers purchasing options. SLS Financial Services has customer friendly programs to help you start smarter, grow faster, and go farther.
Please contact Brett Hawton at SLS financial services today to learn what programs he may have available for you.