| | Cash | Loan | Lease |
Cash
Flow |
Buying has an immediate impact on
cash flow by diminishing cash
reserves. |
A down payment as much as 20% plus
collateral and no ability to include soft
costs (shipping, maintenance, etc.)
means a large cash outlay. |
No down payment required. Leasing usually has less impact on cash flow due to lower payments. |
Line of
Credit |
Liquid assets are depleted and may affect credit. |
Taps the line of credit. |
Does not affect your line of credit. |
Equipment
Risk |
The owner bears all the risk of
equipment devaluation and must track
obsolescence. |
The owner bears all the risk of equipment
devaluation and must track
obsolescence. |
In many leases, the lessor manages the burden of taxes and insurance. |
Asset
Liability |
Owners must manage asset liability on
their books. Financial accounting
requires owned equipment to appear
as an asset with a corresponding
liability on the balance sheet. |
Owners must manage asset liability on
their books and are required to have
equipment appear as an asset with a
corresponding liability on the balance
sheet. |
Operating lease assets are
expensed. Such assets do not
appear on the balance sheet, which
can improve ROA. |
| Rate Risk |
Cash should be used for income
producing investments since you pay
with today’s dollars at today’s value. |
Banks prefer to loan money on a floating
or variable rate tied to prime. Rate risk is
on the customer, not the bank. |
Payments are fixed for the lease
term. Pay with next year’s inflated
dollars and take advantage of
inflation. |
Soft
Costs |
Covering soft costs including
installation, training, and software
erode cash reserves. |
Banks rarely finance soft costs. Cash is
needed to cover these expenses. |
Leasing may cover all costs so no
large cash outlay is needed. |
Upgrading
Equipment |
Owners must manage the
disposal/selling of outdated
equipment. This can slow down the
upgrade process. |
Owners must manage the
disposal/selling of outdated equipment.
This can slow down the upgrade process. |
Leasing allows for easy upgrades
and you may keep the same
payment by extending the lease
term. |
Tax and
Liability |
Owners must manage asset liability on
their books. Accounting standards
require owned equipment to appear as
an asset with corresponding liability on
the balance sheet. |
Depreciation is tied to IRS depreciation
schedules. With loans, you can only write
off interest portion of loan. Principal is
depreciated. |
With tax leases, lessees claim the
entire lease payment as a
deduction. Non-Tax leases use
accelerated depreciation resulting
in larger tax deductions. Tax
savings can be substantial. |
