Leasing and Financing FAQ
Leasing is a contractual agreement where a lessor (leasing company) provides the lessee (client), the right to use its equipment for a specified length of time contingent on a specified payment plan. Depending on the client’s needs, the lessee may purchase, return, or continue to lease the equipment at the end of the lease term.
Question Worth Considering
Recognizing Your Business Needs
Q: What is the cost of generating cash from operation, raising equity, or bond money?
A: Time and effort are two major costs of generating cash from operations, raising equity, or bond money. Ask yourself what is the time and effort you have to spend on business operations, sales, expenses, depreciation, fee, paperwork for loans, searching for investors, etc. just to acquire your equipment? Is it worth it when the after-tax value makes using cash generated from operations, equity, and bonds costlier than financing? $100 from operations (after tax value) is not the same as using $100 acquired from financing. Cash generated from these forms is decreased by the amount of tax owed each year and your business may acquire opportunity loss due to the lack of capital. In addition, leasing is a cost-effective, risk free form of acquiring your equipment. No collateral or partial business ownership is required. In the case of default, ACG simply takes away the equipment; whereas an investor or bank demands liquidation of your asset or takes away collateral. Leasing with ACG will allow you to spend less time worrying, more time to operate your business, and plan for its future.
Q: Does your company desire to invest cash or equity into a depreciating asset?
A: If you are looking into getting equipment, it is important to know if you want to own the equipment or use it as a source of profit generation. If you want to own something and have it gain profits you are most likely looking into real estate, collectibles, patents, etc, because these items appreciate in price over time. Equipment depreciates in price over time and will not produce a profit when it is no longer needed due to its life, usage, and book value. Leasing is the best alternative to diversify the risks of depreciation and conserving cash for profit generating opportunities. Furthermore, dealing with equipment that needs to constantly be maintained, repaired, and replaced due to constant technological advances buying equipment does not allow the feasibility leasing provides business owners.
Q: Does paying upfront cash prevent the implementation of an IT upgrade strategy? Or Equipment upgrades?
A: Paying cash upfront restricts the company’s liquidity leaving little room for important investments on technological advances and the latest equipment. Investing in upgrades gives companies across the border a competitive advantage. However paying a large sum of cash upfront on a fixed asset restricts upgrades due to the lack of liquidity. Leasing provides you with the flexibility and manageability of maintaining liquidity and promoting a competitive advantage strategy through short term leases.
Q: What is the opportunity cost of not investing cash or equity into higher ROI alternatives?
A: The opportunity cost is the profit you can’t take advantage of simply because you do not have the cash at hand to take advantage of a new opportunity. Equipment leasing gives you the financial flexibility and accountability to take advantage of higher ROI investments. Nevertheless, different businesses have different opportunity costs based on their current cash flows. Because paying cash avoids finance charges and interest expense, the lower cash outlay lulls business people into thinking that it is a good way to acquire equipment. However, these so called savings can wind up hurting your business by preventing progress in other critical areas. Liquidity is critical to all companies. Its an important aspect of survival when slow paying customers and unexpected expenses put pressure on cash reserves. But besides allowing reserves to meet crisis situations, cash can allow a company to take advantage of opportunities. Here are just some of the alternative uses of available cash: quantity buying opportunities, cash discounts, fund new research and development, expand marketing and advertising efforts, hire the competitor’s best salesperson, acquire the competition, and investment in your own company.
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High Level Advantages of Leasing
Benefits for the Future
- Conserve cash, working capital and bank lines
- Reduce total cost of ownership
- 100% tax deductible on the lease payment over the life of the lease
- Avoid expensive upkeep and maintenance cost in the future years of equipment lifecycle
- Matches revenue to lease payments over the lease term
- Create a predictable equipment budget
- Establishes an equipment upgrade strategy
- Allow the flexibility to upgrade to newer, more efficient equipment
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