How to Improve Your Cash Flow by Leasing Equipment

Run Your Business Jul 15, 2020
Equipment could be costly to acquire from the get-go. Consider leasing equipment to lower the barrier of setting up your business and improve your cash flow.
Acquiring equipment for your business can be costly for small business. Photo by Pixabay on Pexels.

Maintaining positive cash flow is essential, especially for new businesses. Purchasing equipment often takes up a significant chunk of your available cash resources and does not immediately turn a profit. Every dollar counts! But how do you go about acquiring the equipment necessary for your business without taking a massive hit to your cash resources? You can consider leasing equipment.

Leasing equipment is one of the many ways you can improve your organization's cash flow.

For businesses faced with limited capital, leasing equipment can come in handy due to its lower short-term financial impact and potential tax savings. This frees up more cash that can be redirected to other aspects of the business. It also helps companies that cannot afford the upfront cost of purchasing or the costlier down payment required to take a bank loan.

Did you know?: 29% of startups fail due to insufficient cash flow

You can manage your cash flow by analyzing the cash flow statement to gain insight and give your company more financial flexibility. To learn more about how to improve your cash flow and how cash flow statements are prepared, check out our cash flow statement guide here.

Types of Leases

Nowadays, many companies provide leasing options that allow you to lease equipment for a determined period. Besides improving your cash flow, this also enables you to seek out upgrades or switch equipment quickly at the end of a leasing contract.

There are two types of leases: operating lease and capital lease.

Operating Lease

This refers to the leasing of equipment, typically for a shorter period. After the period has ended, it returns to the leasing company. As the cost from an operating lease is considered an operating expense, you do not get depreciation deductions from it. However, you can still write it off in your tax return.

Capital Lease

On the other hand, a capital lease (also known as finance lease) lasts significantly longer. However, there is an option to purchase the equipment at the end of the leasing period. The present value of the entire cost of the capital lease is treated as a fixed asset, and interest charged on the contract is recorded as an expense. Therefore, equipment acquired through a capital lease is subject to depreciation and tax savings. As an asset, it can also serve as collateral for you to qualify for a bank loan.

If you decide to lease equipment, lots of research must be done before proceeding with a lease agreement.
Before jumping into a lease agreement, you should do ample research and consider some factors. Photo by Andrea Piacquadio on Pexels.

Things to Consider Before Leasing Equipment

If you decide to lease equipment, the leasing period should not exceed the equipment's usable lifespan. No one wants to keep paying for leased equipment that is already obsolete.

The duration of the lease should also be considered. If your business requirements change and the equipment is no longer required, you might have to pay hefty penalty fees for terminating the lease agreement.

Lastly, the equipment should be used for a large part of its leasing period. If you are leasing equipment that will only be used a few times, the leasing cost might not be worth it. You might want to consider looking into an outsourced service provider for the functions required instead.

In Summary

Reasons to Lease Equipment

  • You are facing a cash shortage or negative cash flow
  • Your equipment will become obsolete within a short period
  • You are not eligible for a bank loan to purchase equipment

The Benefits of Leasing Equipment

  • Better flexibility
  • Little to no down payment required
  • Tax benefits such as capital allowances and deductible expenses
  • Able to serve as additional collateral to qualify for bank loans (capital lease only)

Things to Consider Before Leasing Equipment

  • The usable lifespan of the equipment
  • Duration of lease
  • Penalty fees for termination
  • Frequency of equipment used during lease duration

Addie Ho

Passionate about learning something new every day, Addie is part of Deskera's Product team that works on upcoming features and strives on improving user experience.

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