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Choosing Sweeping Equipment

Choosing Sweeping Equipment

Buying vs Leasing Your Sweepers

by Michael Paez

One of the most common questions we hear today is "why should I lease?" Different reasons motivate firms to choose leasing. Most often the choice is rooted in one of three primary motivators: capital preservation, flexibility and deductibility. Accordingly, this article focuses on these. First, an overview:

Probably the foremost reason for opting to lease is because the hard earned dollars you have in your bank and in your investments can stay in place. Also, when you buy a long-term piece of equipment you are in effect paying 100% of the cost for the asset today, even though the income from that asset will be derived in the future. That is why leasing is often called 'the inflation hedge': you pay today's price for the equipment, but you use tomorrow's cheaper dollars. Also important is that after the Tax Reform Act of 1986, lease payments are now one of the few remaining pre-tax deductions. As a direct result, depreciation no longer represents as strong a tax benefit as does leasing.

An important reason why most business owners choose to preserve their cash position is that because leasing allows your cash and investments to remain as equity, it keeps other lines of credit available. Traditional bank lines of credit and term loans are best used for short term and/or seasonal cash flow requirements. When you reduce your cash position, these become more difficult to qualify for. In today's conservative lending environment, the use of bank loans for large capital purchases will often prevent the small and medium-sized business owner from gaining additional short term credit if it is needed at a later date. It is also important to realize that leases, by their very definition, are not considered part of a company's debt structure. Bankers are now much more sensitive to total debt in relation to equity. The required cash flow available for repayment is also now higher.

In any large dollar purchase, tax consequences should play a big role in determining the feasibility and structure of the transaction. Once again, leasing fits the bill. In most instances your monthly lease payment is deductible, pre-tax, dollar for dollar. This is because lease payments are usually considered an operating expense, which means they are then allowable as direct pre-tax deductions. Accounting expenses related to equipment capitalization are thus eliminated, as well as the standard corresponding reduction in pre-tax expenses based on depreciation over the useful life of the equipment.

When considering the acquisition of your new sweeper, the decision about how to finance is both critical and complicated. Just as you no doubt research the available equipment alternatives before choosing a new piece of equipment, you should also review the financing alternatives before you decide how to pay for it. Quite likely you, like many of your counterparts, will arrive at the conclusion that leasing is the best option. When you consider the advantages of pre-tax writeoffs, preservation of your capital position and the tremendous flexibility offered through the customized structure which leasing allows, for most the choice is clear.

Michael Paez has a Master's Degree in finance and has been in the leasing business for nearly a decade. He was formerly a Commercial Loan Officer with Manufacturers Hanover.

This article is reprinted from American Sweeper magazine, v1 n1.

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