Leasing is an intelligent method of acquisition when compared to buying technology with cash or using your line of credit at the bank.
While these are valid options, leasing has proven better for companies concerned with streamlining cash flow, preserving after-tax capital and protecting credit lines best used for business growth. Further, tax benefits and financial statement accounting treatment add to the overall benefit of leasing when weighed against a cash purchase.
Treating an item as a capital outlay really only makes sense if it will appreciate in value. Conserving your working capital now will help even out cash flow by spreading the cost of your new solution over a few years instead of a large upfront expenditure. Additionally, leasing may qualify for off-balance sheet accounting treatment thereby avoiding a recorded liability or debt. With technology changing every day, it's not uncommon to find yourself surrounded by obsolete equipment that requires an expensive write off.
| Leasing | Cash Purchase | Line of Credit | |
|---|---|---|---|
Accounting Treatment * | In many cases, a well structured lease will qualify as off-balance sheet financing. Monthly payments are generally deducted as an operating expense. |
Tax savings derived from purchased equipment comes in the form of "Depreciation". |
Typically, a loan is required to be recorded on your balance sheet as a liability (debt). |
Cash Flow | Almost always better for company "cash flow" because the cost is spread over time in equal monthly payments. Frees up capital to use for other purposes. |
At first glance, the cost seems less if paid in full – total cash price is less than the sum of the monthly payments – but this is deceiving because simply multiplying payment by the term is not an accurate assessment of cost as it does not account for the time value of money. |
Tapping into your line of credit with the bank will use up borrowing power that may be needed for something else. |