Many entrepreneurs have to juggle with cash shortages while setting up and growing a business. However, you can spend less by leasing equipment instead of buying. Business owners all over the world operate in an aggressive and highly competitive environment. Conserving working capital can give you an edge over competitors. It is not wise to buy expensive equipment which will be obsolete within a short time. This is true for businesses operating in the high-tech sector where technological advances happen at a breakneck speed. The average time for a lease will run for about 2 to 5 years after which you can update to better equipment. The following are some of the ways you can improve business cash flow by leasing.
Conserving Working Capital
According to statistics from the Small Business Administration (SBA), 80 percent of small businesses and startups fail within the first three years. There are several factors which can lead to such a situation. Chief among them is insufficient capital, unexpected growth, and poor credit arrangements. If you decide to take the leasing methods, the facilitation is easier than applying for equipment loans.
Leasing is generally reflected as a business operating cost that is deductible from taxable profits. It is advisable to consult your accountant to ensure that the equipment lease being considered is eligible for tax deductions.
You might also be lucky because some leasing companies claim capital allowances on behalf of clients.
Avoid Negative Equity
If you acquire business equipment on loan, depreciation will be much faster than equity build up. It is important to note that equipment lease has two facets. These are the cost of money and depreciation. You can look at depreciation as the difference between capital cost and residual value. You will be saddled with lower payments if the leased equipment has high residual value. The downside to such an arrangement will be paying more if you choose to buy the equipment after the lease period ends.
Leasing Does Not Affect Bank Credit
Using leasing as a form of business financing still leaves you with access to traditional credit lines. This can be crucial to the survival of your fledgling business. A study carried out by the small business administration (SBA) revealed that businesses with more than $50,000 in working capital have low closure rates.
Leasing Is Easy To Finance
In most cases, equipment leasing does not involve large outlays of capital. This means that you can easily finance up to 100 percent of the equipment cost. In addition, leasing companies do not require long credit history records in order to approve your lease. On the other hand, a bank will require credit history spanning 2 to 3 years. This might be an unrealistic demand for young businesses to fulfill. Equipment leasing gives you room to maneuver and expand a business without worrying about finances.