Equipment decisions can affect the value of your business

Whether it's a computer system, a photocopier or even a delivery vehicle or something else, you need business equipment to keep your company operating successfully and competitively. But the difference between leasing and buying your business equipment can have a substantial impact on the value of your business.

An increasing number of companies, especially small businesses, are choosing to lease rather than buy business equipment. According to a national survey conducted last year by the US Small Business Administration and the Equipment Leasing Association (ELA), 67 percent of US companies lease some or all of their equipment. And about $280 billion worth of equipment will be leased this year alone, according to the ELA's Web site.

Why lease?

Today, it's possible to lease just about anything, from sophisticated manufacturing equipment to filing cabinets and water coolers.
Leasing is often an attractive option for entrepreneurs looking to expand their businesses without tying up working capital in expenditures for such needs as computers, fax machines and phone systems.

A lease can be cheaper than a loan because, instead of financing the full purchase price, your paying the amount that the equipment is expected to depreciate during your rental term. And, unlike a loan, a lease usually doesn't require a down payment or collateral.

During the term of your lease, typically from six months to six years, you make monthly payments to the leasing company. At the lease's conclusion, you usually have the choice of buying the equipment, returning it or extending the lease.

When?

Deciding whether you should purchase or lease your business equipment depends on a variety of factors, including the type of business you own, the equipment you need and your available credit.

You may want to consider leasing in one of the following scenarios:

· You have a limited amount of working capital or wish to use your capital for other purposes.
· You need equipment that is prohibitively expensive or likely to quickly become technologically obsolete.
· You want to obtain equipment quickly, without the paperwork associated with a loan application.
· You want to take advantage of tax benefits

Lease payments are usually 100 percent deductible as an operating expense and may be deducted on a monthly basis. Loans are not tax deductible but any interest paid is deductible.

Ownership has privileges

Depending on your situation, you might want to purchase your business equipment outright. Ownership can potentially provide some valuable benefits, such as long-term cost savings, trade-in value and option of keeping your equipment for as long as you want.

Consider buying your business equipment if you:

· Have enough working capital or a line of credit available to make the purchase.
· Prefer not to be locked into a lease agreement for equipment you may no longer need. Leases often carry penalties for early termination.
· Want to be the owner of your equipment and have the option of selling it.
· Don't want to increase your debts, and you can use your own capital to purchase equipment

Read the fine print:

If you decided leasing is your best option, be sure to shop around for the lease that is most appropriate for your business' overall financial picture and potential for future growth.

Don't sign a lease until you understand every clause and its implications. As with any contract, pay attention to the lease terms

Here are a few of the more common lease options:

· Operating leases usually feature a lease term that is shorter than the expected useful life of the equipment. At lease-end, you can typically extend the lease, return the equipment or buy the equipment at fair market value.
· Finance leases are usually used by firms that want to own the leased equipment at the end of the lease term.

With a finance lease, your company will claim ownership of the equipment for tax purposes even though the equipment still technically belongs to the leasing company until the end of the lease.

Written by Derrick Kinney, Derrick is a senior financial advisor with American Express Financial Advisors. His offices, are located in Arlington and Hurst. He can be reached at (817) 419-6001 or at www.derrickkinney.com.