Business equipment leasing and financing.
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Lease, Finance or Purchase?

Many companies lease equipment because leasing provides the best means of preserving working capital.  By leasing, a company can obtain the use of the most equipment with the lowest cash outlay.  Frequently the questions of tax advantages, interest rates, and financial structure arise.  A prudent decision maker only considers these issues to determine how they will affect the use of working capital.  A savvy finance manager does not fall prey to the lure of ownership of a depreciable asset.  "Lease that which depreciates and buy that which appreciates."  - J. Paul Getty.

Many decision makers think interest cost is the primary consideration when deciding whether to lease, finance or purchase the acquisition of equipment.  There are many simplistic computer programs to calculate the difference between leasing and financing, using the loan interest rate and the effective interest rate as the only considerations.  Few of these programs employ any form of working capital analysis. The use of working capital is far more important to the business owner's profits than the interest cost.  To thoroughly answer this question, one must justify the acquisition by calculating the operating profit the acquisition will generate and then determine the cost of acquisition.  Then one must objectively consider two perspectives:

First, business owners should consider the effect on their personal assets and liabilities.   Prudent business owners must know this, or they might be forced to close their doors without knowing exactly what effect that would have on them personally.  Have they honored all their obligations?  Will their personal credit and reputation suffer?  If the company can pay cash for the proposed asset, they have added an asset with no liability.  A very safe position, but to quote an unknown sage "A ship is safe in port but ships aren't built for that".  A capital asset should be acquired with financing or leasing while keeping sufficient liquid assets available to pay off any obligations created in the acquisition, keeping in mind the worst case liquidation value of the asset.

The second perspective is cost.  What is the total cost of making the acquisition?  The normal rule: the lower the interest cost, the higher the net profits.  Many decision makers fall into the trap of believing this is the only rule and look no further.  It can be a good rule, as long as the effect on the amount of their working capital is equal.

Which brings one back to the first rule of business:  Working capital is the most valuable tangible asset of a business and must always be preserved for it best and highest use.  The use of working capital creates profit.  Leasing allows for the best use of the most working capital, which translates directly to more profit.  Leasing means lower cash outlay and effective reduction of tax liability.  Leasing provides ease of maintaining the most effective means of production and also preserves and creates working capital better than any other method of obtaining equipment.

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