To Lease or Not to Lease?

Whether it is a car, office equipment, or production equipment, you have choices.

1. Pay cash

2. Finance with your bank or vendor

3. Lease from a variety of financiers

As a small business, I strongly encourage you to finance or lease, not pay cash.  Although you may look at the financing cost and say why incur that cost if you are liquid, you may not always be liquid.  Exhibit A, your honor, the pandemic.  If you faced this decision in late 2019 or very early 2020, you could have easily paid cash.  Then the pandemic reared its ugly head, and oops, all of a sudden you were not so liquid.  

If we have learned nothing else from the pandemic, amass as much liquidity as possible.  You can’t have too much, and when you need it, very few will lend it to you.  Unless you have unlimited liquid resources, always finance any fixed asset in one form or another.

Rule out option number one above.  You will thank me some day.

Definitely financing with your bank or vendor has a number of benefits, not the least of which is cost.  Banks are still the lowest cost of borrowing, and vendors have a huge incentive in making the sale.  Having said that, the banks may have credit standards too stringent for your current financial position.

There are many leasing options, and often the equipment vendor may have a referral program for you.  And true leases offer a number of other benefits.  You pay less than you would in absolute dollars for a loan (although the effective interest rate may be higher), and you may be able to return the equipment at some point.  (Think in terms of a rental.  You rent it for two years, then you return it for the latest and greatest.)  Wonderful flexibility.

Here at GEMPIRE we just found very favorable terms for our high performance color copier.  We have a year left on the lease, and we asked them to entertain extending the term at a much lower monthly rate.  They did not want to take the machine back in twelve months, and we did not see the need for the latest and greatest.  The current machine performs all that we need at a favorable per piece cost.  And maintenance is still included in our lease (Remember, they own it, not us.  We just rent it from them.).  With the new negotiated monthly payment, our unit costs drop even further.  

Why spend $30,000 or more in precious working capital when we can continue to pay a favorable monthly rental.  In effect, we are paying for the equipment with the revenues associated with the equipment costs.  Just like the matching principle in accounting.

You need your working capital for other uses – purchasing inventory, covering expenses, and in the worst case absorbing temporary cash flow losses - Basically running your business solvently.  

Debt can be your friend.

You are most certainly welcome!