How Leasing Helps Business Finances
For many businesses, it’s obvious that leasing can help increase cash flow in that, if you don’t have to spend all of your capital on your operating costs, you have more money overall in the bank, which means you will have more cash for growth - incidentals, hiring new staff, smaller purchases, and so forth.
Leasing allows companies the freedom to “borrow” equipment that is needed - usually top of the line items - now when it is needed and not when your business can truly afford to buy the asset. But in what ways other than cash flow does leasing help?
There are multiple benefits of leasing if companies choose the right leases, the right terms, and the right products. Intelligent finance teams can calculate the ROI for any leased equipment (i.e. operating cost versus cost per month of the lease versus how much revenue each piece of equipment generates). Once ROI is calculated, and your company has determined that leasing is the smarter financial choice, here’s how leasing helps business finances - in real terms.
Let’s face it. Many companies are digital these days, which means they require computers. Your company may have the capital to upgrade equipment regularly, and, if so, great, but does it really make sense to buy an entire new set of computers every single year? Probably not. When you need regular upgrades, it makes sense to lease - but only with favourable terms. If you can lease new computers, say, every two years or so, there are a multitude of benefits. Faster more functional computers mean higher productivity for your staff (they don’t have to go and make a cup of tea whilst they’re waiting for their spreadsheet or PDF to load), it means improved security (often defences only protect against known threats, and if your computer software and patches are old, then you’re opening yourself up to problems) and, often, newer means better customer experience too. How many times have you been on to some customer service department only for the representative to say, “Hang on! I’m waiting for my screen to load. Oh no! The system is down again.”
If your company doesn’t work in the latest computer tech, you can still benefit from upgrades too. Newer cars every three years for your sales teams means fewer repair costs, and if you lease the asset, those repairs are often still covered under warranty so that means no incidental, unexpected costs to you - check what’s covered in the agreement very carefully before you sign the dotted line, though.
You may even be the type of company that needs to stay cutting edge. If you need the latest and greatest high-tech printing techniques, and your competition has just upgraded to the new UV LED printer, and you don’t have one, you might be losing business. Leasing always allows you to stay current - ahead of your cash flow.
You won’t make good returns if you have to spend capital buying new stuff every six, twelve, thirty-six months or so, so that doesn’t make sense. Even if leased equipment is more expensive overall, you won’t ever be responsible for the entire ticket price (plus interest), but only the depreciation value, and when the lease is over you give it back; you don’t have to worry about selling it. If you upgraded each year with your own capital, you’d either have to figure out how to sell the older asset or store it - both of which can be time-consuming and costly to you.
Lower Monthly Running Costs
When you as a business finance equipment, there are often higher down payments and higher monthly costs. At the end of your payments, you do own the equipment - which is beneficial - and you have built equity in the item; however, if the equipment has become obsolete in that time period, and you are stuck with selling the equipment, you may run into problems down the line.
With leasing, you don’t own the asset, you have no equity, and you cannot recoup any losses by selling the asset; however, there are usually lower monthly payments with low to no down payment to acquire the asset.
Even though long-term, leasing can be more expensive, you do not lose out on the value of the item. You only pay for the depreciation of the item over time, and not for the total cost of the leased item itself. Therefore, your payments are less in leasing, and your responsibility is also less.
Leasing also offers more flexible terms, which means leasing companies can offer terms that fit both your needs and your budget. You can have a closed-end lease agreement, an open-end lease, balloon payments, and many other payment options. Always be aware of the risks associated with leasing to make sure you understand the terms involved - and negotiate the terms you want - before signing.
Bigger Profit Margins
Depending on the kinds of assets you need to lease for your business, you can use leases to create bigger profits. For example, it’s well known that most airlines lease their fleets because they cannot afford to buy outright and maintain aeroplanes themselves. Whilst they find it more economical to lease they then find they make higher profits by doing so (because if they didn’t make higher profits, they wouldn’t bother leasing over so many years, would they?). Airlines also have the flexibility of leasing to increase capacity. If they need to charter more flights, guess what? They can lease a few more aeroplanes. They can get those aeroplanes immediately, and they don’t have to buy, operate, and maintain new equipment that they may not need two months from now. Once they’ve finished their extra flights, they can figuratively hand back the keys.
The airlines that acquire - under current lease standards - seem to have no debts and only assets when they lease (which will change when IFRS 16 rolls around), but they also don’t have the costs of updating aeroplanes when older models aren’t viable. Ever been on one of those pond hopper flights on an old plane, the kind where the stairs to the plane and the door to the plane are one? It isn't’ the best customer experience. Passengers want to fly on newer planes that seem safe.
For your business, taking a leaf from the airline industry booklet can help with bigger profits, especially if the equipment you need to run your business is expensive. Where would airlines be without the aeroplanes themselves?
Many who know about leasing also know that leasing means tax breaks. Lease payments can be deducted as a business expense on your business taxes, and since even small companies may spend £20k or more on having business taxes done, any way to save money will be most welcome. Lower taxes also mean you have more credit available and more capital to invest back into your business.
Because leasing often means you put down little to zero down payment to get the equipment you want quickly, you can preserve your cash and your credit lines for future use. Often loans have lengthy approval ratings, and if you have some strikes against your person or business credit history, you may not get favourable financing terms for buying. Often, though, as the finance is secured against the asset, you can get better options from leasing than if you were trying to purchase the same equipment.
Leasing equipment can also help you with understanding and managing your monthly (and yearly) operating costs, which helps with overall budgeting. Once you know your expenses, your accountants and finance teams can simply keep track of profits - does that equipment bring returns? If not, you can figure out if you need to update, or if you need to use that asset more productively.
More Attractive Balance Sheet
Lease payments made monthly are seen as a business expense instead of a long-term debt. Having a balance sheet with little debt helps secure future lines of financing (as mentioned above). Even with IFRS 16’s new reporting standards upcoming, the balance sheet will still work in your business’s favour.
You cannot discuss how leasing helps business finances without mentioning cash flow. Not having to commit lots of your capital up front can help your business manage that cash flow more efficiently, especially if you’re a new business. Leasing offers lower down payments and lower monthly payments. It frees up that cash for lines of credit, smaller purchases, and investing in your company’s employees as you grow. Just as in your personal account, you couldn’t really operate (at least not without lots of worries) without something in savings, it’s not such a good idea to operate with a £0 balance in the bank.
Leasing isn’t for every company or every situation, and your accountants will best be able to determine if leasing is right for your business. Keep in mind that the overall cost of leasing will always be greater if you end up keeping the asset. If you find that you no longer need the equipment, depending on your agreement, there may be early termination fees at the end of the lease. With the right agreement, you may time the return of the asset with the end of its useful life for your business. Again, your finance teams need to be smart in negotiating and understanding the complicated terms and conditions associated with the lease. The lease company is a business too, but you can both negotiate favourable terms that benefit your business. When you lease, there are numerous benefits, but you have to be smart about the terms and know exactly what you’re getting.
Still Want To Know More About Leasing?
Take a look at The Ultimate Guide to Leasing - The Basics. You can find out all about leasing, the benefits of leasing for your company, and how to make the most of leasing for your business. Download your free copy of this whitepaper now.