To Lease or to Buy? Hennessey Capital Leasing Offers Tips, Best Practices for Small Businesses

May 25, 2006; 05:51 AM
TAMPA, Fla.- From the heavy equipment in the warehouse to the office equipment on the desks out front, leasing can be a smart business decision for many companies, according to Hennessey Capital Leasing (http://www.hennesseyleasing.com).

According to the most recent Equipment Leasing Association survey of the Small Business Administration's State Small Business Contest winners, 86 percent lease equipment, for reasons that range from budgeting and establishing consistent cash flow to the ability to upgrade equipment more frequently.

However, although equipment can be leased to handle needs in almost any industry, many small to mid-sized business owners are unsure how to determine whether this option is right for them.

Common types of leases

"Most business owners believe they need to own their equipment," says David Wolf, CEO of Hennessey Capital Leasing. "But it's worth noting that the benefit of many assets derives from use, not from ownership, making the financial implications the most important consideration."

Wolf adds that leasing provides greater flexibility in financing options for asset acquisitions and business expansion. "Every situation is unique, so the key is trying to find the right structure to fill that particular need."

The two most common lease arrangements are capital leases and operating leases. A capital lease, which Wolf refers to as a "loan in disguise," allows the lessee to depreciate the asset and write off the interest, while avoiding a large down payment. Capital leases appeal to businesses that ultimately plan to own the equipment but prefer to preserve their banking relationships and working capital for other ventures.

On the other hand, operating leases can be an ideal option for companies that regularly upgrade equipment. Operating leases provide a hedge against obsolescence: the ability to return the equipment to the lessor at the end of the term. This frees the lessee from any obligation and can facilitate the upgrade process. These leases also tend to yield lower payments and are expensed, so they don't appear on the balance sheet as long-term debt. One of the most attractive features of an operating lease structure is the tax benefit, which allows the lessee to write off the entire amount of the lease payment. "In capital intensive industries, it can make a lot of sense to structure something as an operating lease," says Wolf.

Is leasing right for my business?

Typically, leasing is best for established companies, although it can occasionally be the right choice for a startup. When considering leasing, start with the following questions:

-- How will I be using this equipment?

-- Will I require regular upgrades?

-- What is the best use of our working capital?

-- Are we planning expansion or acquisitions?

-- Does it make more sense to preserve my bank relationships for equity lines of credit or growth financing, rather than for a loan to acquire equipment?

-- What is my tax situation?

-- How does the lease payment compare with a regular loan payment?

-- Will I benefit from off-balance sheet financing?

If a company does opt to lease, finding the right partner is key. "Because leasing tends to be a long-term partnership, it's essential to find a leasing partner who knows the company's business and can advise as to the best options for its particular situation," says Wolf.

Understanding your company's needs, plans and specific financial position are critical when considering a leasing arrangement. Then, with the right partner and a well-structured agreement, leasing can be a winning strategy for many businesses.

Hennessey Capital Leasing (http://www.hennesseyleasing.com) is a relationship-based equipment leasing company operating out of Tampa, Fla. With exceptional service and an innovative approach, Hennessey Capital Leasing provides equipment leasing services for commercial organizations ranging from start-ups to mature companies, and offers almost any kind of equipment, including small ticket and multi-million dollar machines. Hennessey Capital Leasing is part of the Hennessey group of companies, consisting of Hennessey Enterprises, Hennessey Capital Southeast, Hennessey Capital and Hennessey Capital Solutions.