When it comes down to it, most business owners, CFOs and CTOs have objectives to streamline the business and keep unnecessary costs to a minimum. Here, we answer the important questions around the impact of leasing on company finances:
"If we have cash shouldn't we just buy our own equipment and services?"
At times of uncertain interest rates and inflation, cash, just as any other asset, is liable to change in value. In contrast, lease rates tend to be flat - making it much easier to predict your cash flow over the duration of the lease period. Cash is best used to reinvest in the business or saved in case of emergency and spares you from having to delve into your company overdraft.
"Why not purchase equipment and services using a bank loan?"
The benefit of leasing over a bank loan is that bank facilities should be utilised for cash flow purposes. If a company takes out a bank loan to acquire assets, then they are reducing any facility that they might require from the bank to fund day-to-day business activity - they might, for example, win a contract that requires large initial outlay, they might need to fund stock purchases or they might want to grab market initiative with a marketing campaign - if they have tied up bank facilities in assets, then that company is not able to use the bank when their business needs to react quickly to market opportunities. By leasing, you are leaving their bank facilities intact.
"How will a lease affect my balance sheet?"
Some types of leases can be recorded off-balance sheet. This can help improve some of your financial indicators such as debt-to-equity ratio or earnings-to-fixed-assets ratio. The knock-on effect of this is an improvement in your compliance with Basel II capital adequacy requirements and an overall reduction in your borrowing costs.
"Do IT leases carry any tax benefits?"
Yes. Currently lease payments count as operating expenses and are therefore fully tax-deductible. On the other hand, when using capital to fund equipment purchase, only the depreciation costs are deductible from your tax.
"Are there any other financial benefits of leasing?"
In creating a predictable and tax-deductible monthly payment structure, leasing also ensures you don't encounter redundancy or obsolescence difficulties. Selling your used equipment on the secondary market can be a difficult and long-winded process that does not regain you a great deal of capital.
IT leases are also much more flexible when it comes to changing your existing IT infrastructure and some will even ensure you are provided any updates or upgrades as they become available. No more expensive IT items on the balance sheet.