The Advantages of Leasing

Among the benefits of leasing equipment are (1) conservation of capital, (2) payment flexibility, (3) residual value risk, (4) tax advantages, (5) operational flexibility, (6) upgrade flexibility, and (7) flexibility to act quickly to meet changing requirements. Addressing each benefit:

Conservation of capital. Unlike other methods of financing, leasing does not typically involve up-front commitment fees or require down payments or deposits. Additionally, many organizations are subject to regulatory requirements regarding the financial liquidity of a percentage of their asset base. In these cases, leasing allows a company’s assets to be invested in fluid financial instruments rather than in hard assets, which are typically difficult to convert and are illiquid.

Leasing also enables a facility to manage assets by allowing it to keep its cash and still expand. This includes being able to roll tax and other soft costs, such as installation, into the lease. In short, leasing allows for a zero down payment for new equipment. Leasing a $20,000 system for $450 a month frees up $19,550 cash to be put toward other purchases, such as:

• extra units;
• renovating a second location;
• adding an additional system, such as security, nurse call, audio, etc.; or
• purchasing upgraded models.

Leasing is a natural choice for rapidly growing facilities. Inventory and receivables spike when a facility is adding new residents. It permits a facility to keep cash and control cash flow more effectively.

Payment flexibility. Lessors provide payment flexibility tailored to the user’s specific cash flow or budgetary requirements. The payments may be made monthly, quarterly, semiannually, or annually, with payment dates either in advance or arrears. Lessors can also provide payment and term flexibility tailored to match either project or revenue-generation milestones. Additionally, unlike a flat depreciation schedule or typical purchase financing, a lease can provide stepped payments, which either increase or decrease at specific times. An example of this payment flexibility would be financing a project that had a significant start-up period before revenue generation.

Leasing has less effect on budgets than purchasing. Therefore, it provides companies with the opportunity to realize operational savings and productivity improvements in a more timely manner.

Residual value risk. Leasing provides a hedge against obsolescence, facilitates upgrading, and assists in the disposal of old equipment. Although there is a lot of new equipment that keeps facilities competitive and updated, the value of these assets over a three- to five-year period is unsure. Moreover, most equipment entails maintenance costs. Leasing equipment enables facilities to stay ahead of the curve and offer residents and patients the latest technology, while keeping the costs manageable.

Tax advantages. Some facilities are aware that leasing provides a no-money-down solution-but many are not aware that if structured properly, the total cost of the lease can actually be less than the equipment. For example, a piece of equipment that cost $20,000 ends up only costing the facility $17,534 because of the tax advantages associated with a lease payment. But beware: Many brokers are not aware (or do not inform) customers that this is only applicable to certain leases, particularly those with a 1% buyout clause. Strategic funding counsel from a reputable leasing company is essential.

In general, from an accounting standpoint, potential lessees should consider the benefit of leasing versus the tax benefit of equipment depreciation. Leasing allows a facility to update equipment regularly and stay ahead of trends and code requirements while preserving cash and credit lines. However, if a piece of equipment won’t become obsolete within a reasonable time, purchasing it may be the best option. Remember, leased equipment is expensed as “rental expense”; the lease terms will often allow a more rapid recovery of the cost of the equipment if you decide to purchase.

Often, though, some equipment is deemed obsolete by the lessee at the end of the lease and returned for more current technology or products that require less maintenance and downtime. However, accelerated depreciation is permitted under certain circumstances; this is a point on which a professional accountant should be consulted.

Operational flexibility. A fair market value lease term can vary from a few months to four or more years, depending on the asset class involved. Corporations depreciate most major new assets over five years, in contrast to shorter lease terms. In comparison, technology moves in two- to three-year cycles. Leasing allows the user to take advantage of technologies’ two- to three-year cycles of performance increases while paying for only the expected reduction in value during the term of the lease. It enables the user to take advantage of a continually improving price/performance curve rather than being locked into equipment that might become obsolete before it has fully depreciated. Many organizations that routinely lease find that it provides a flexible, cost-efficient vehicle to fund new projects.

Upgrade flexibility. Leasing can provide additional flexibility when growth or new demands require an upgrade. Often, equipment has a life span of a few years. Leasing puts the responsibility for the end-of-lease equipment on the lessor; you don’t have to worry about selling the equipment or carrying it as excess inventory. Try to work with the lessor on the end-of-lease value of the equipment to keep your monthly payments as low as possible-but be aware that most lessors will not be friendly to the idea of you paying for eight months and then demanding an upgrade. Also note that contracts generally specify that the lessee is responsible for maintaining the leased equipment, although a warranty or vendor-provided maintenance contract might be included in the agreement and covered by the monthly payment.

Changing requirements. When circumstances change and the lessee finds it advantageous to keep equipment longer than originally anticipated, the lessee has the option at the end of the lease to renew (often at a reduced rental rate) or purchase the equipment at market prices. Conversely, lessors are always willing to entertain proposals for midterm upgrades or replacements, if their business volumes with you justify this action.

Conclusion
Facility management should consider leasing as an option when planning operating and capital expenses and review its possible benefits. But consult a leasing professional when doing so to make sure that the option offers operational, financial, and strategic benefits specific to the organization. In general, leasing may preserve cash and credit lines that might be applied profitably to other aspects of the business.