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Many companies lease equipment because leasing provides the best means
of preserving working capital. By leasing, a company can obtain the use
of the most equipment with the lowest cash outlay. Frequently, the
questions of tax advantages, interest rates, and financial structure
arise. A prudent decision maker only considers these issues to
determine how they will affect the use of working capital. A savvy
finance manager does not fall prey to the lure of ownership of a
depreciable asset. According to J. Paul Getty, you should "lease
that which depreciates and buy that which appreciates."
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Many decision makers think interest
cost is the primary consideration when deciding whether to lease,
finance or purchase equipment. There are many simplistic computer programs
to calculate the difference between leasing and financing, using the
loan interest rate and the effective interest rate as the only
considerations. Few of these programs employ any form of working
capital analysis. The use of working capital is far more important to
the business owner's profits than the interest cost. To thoroughly
answer this question, one must justify the acquisition by calculating
the operating profit the acquisition will generate and then determine
the cost of acquisition. Then one must objectively consider two
perspectives:
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First, business owners should consider
the effect on their personal assets and liabilities. Prudent business
owners must know this, or they might be forced to close their doors
without knowing exactly what effect that would have on them personally.
Have they honored all their obligations? Will their personal credit and
reputation suffer? If the company can pay cash for the proposed asset,
they have added an asset with no liability. A very safe position, but
to quote an unknown sage "A ship is safe in port, but ships
aren't built for that." A capital asset should be acquired
with financing or leasing while keeping sufficient liquid assets
available to pay off any obligations created in the acquisition, keeping
in mind the worst case liquidation value of the asset.
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The second perspective is cost. What
is the total cost of making the acquisition? The normal rule: the lower
the interest cost, the higher the net profits. Many decision makers
fall into the trap of believing this is the only rule and look no
further. It can be a good rule, as long as the effect on the amount of
their working capital is equal.
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This brings one back to the first rule
of business: Working capital is the most valuable tangible asset of a
business and must always be preserved for its best and highest use. The
use of working capital creates profit. Leasing allows for the best use
of the most working capital, which translates directly to more profit.
Leasing means lower cash outlay and effective reduction of tax
liability. Leasing provides ease of maintaining the most effective
means of production and also preserves and creates working capital
better than any other method of obtaining equipment.
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We invite you to explore the attractive
lease programs that JTA Leasing offers. Contact us at 516-650-8638 or
send us an email at mkitaeff@jtaleasing.com
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