Every business understands the significance of employing technologically upgraded equipment in its operations. These assets lay a solid foundation for enhanced productivity and set companies up for future growth and success.
However, before investing, it’s essential to analyze the benefits of procuring the equipment - will it lead to enhanced productivity, give an edge over the competitors, or help reduce costs. Businesses must invest only when convinced that the returns justify the cost of the equipment.
With the current scenario of economic uncertainty, businesses are grappling with an acute financial crunch and are skeptical about investing more money in capital assets. Equipment leasing is a convenient choice that minimizes the initial capital investment, ensures the availability of the latest machinery at low monthly outflows, and safeguards the limited cash reserves of the company for conducting daily operations. These benefits can support businesses immensely in these unprecedented times.
Leasing offers countless perks, but it’s essential to consider relevant factors before leasing equipment. Here’s highlighting some factors business owners must consider before availing of equipment leasing:
1. Cash flow position
Leasing improves the cash flow position of the company. The lease agreement specifies the monthly lease rentals and helps companies to plan their budgets effectively. Additionally, it allows businesses to reserve capital to meet day-to-day expenses and retain a buffer for unplanned circumstances.
Most leases have lower lease rentals as the lessors have assumed a residual value, and businesses need to compensate for when they utilize the equipment. Leasing supports small businesses to invest in technologically advanced equipment without disrupting the cash flow position of the company.
So, if improving cash flows is critical for the business, leasing is worth considering for its equipment needs.
2. Equipment Lifespan
To successfully establish the business and stay ahead of the competition, companies need to upgrade equipment and meet the current quality standards. Depending on the business type, equipment leasing can offer top-notch equipment to cater to the business requirements and provide the best quality products to the end-user.
If the business plans to keep the asset for a short period, leasing might be appropriate. Leasing is also beneficial for those assets which are prone to evolve rapidly with the latest technological advancements.
The new equipment will offer low maintenance costs and extended warranties to protect against unexpected repairs and empower companies to become cost-effective and efficient. If the underlying equipment is subject to frequent technology upgrades, it might be worthwhile to consider leasing.
3. Tax implications
Leasing offers significant tax benefits to the lessee under operating and finance lease.
The operating lease enables the lessee to claim the deduction of lease rentals as business expenses, thereby reducing the taxable income. The finance lease allows companies to include the leased equipment as an asset on the balance sheet. The lessee can claim depreciation and interest expense. The lessee having the ownership of the asset can claim insurance and maintenance expenses.
Businesses planning to reduce the overall taxable income should consider tax implications before taking on the right lease.
Leasing is an attractive option to acquire high-tech equipment, but it also assists in raising capital or money to invest further in the company.
A sale and leaseback option is when the leasing company buys existing equipment and leases it back to the business. This feature helps enterprises unlock funds blocked in the equipment while simultaneously allowing them to benefit from using it.
Small businesses should use this option to generate cash to meet the pressing capital needs of the company.
5. Refinancing existing debt
Refinancing the existing debt allows the borrower to replace the current debt obligation with the new one having favorable terms. Refinancing leased equipment can reduce the borrower’s monthly outflows.
Small businesses may choose this option to take advantage of competitive offers and ensure leases remain cost-effective for the company.
6. Safeguard against inflation
Small businesses tend to safeguard their long-term investments against the rise in prices. It’s advisable to go ahead with a finance lease to secure the company against a possible increase in prices. Such savings will enable businesses to limit their outflows in the long run and ensure the smooth functioning of operations.
Equipment leasing offers enormous benefits and is an efficient tool for companies to navigate the current crisis and revive post the pandemic. If a company requires equipment that needs frequent upgrades, reduces taxable income, or improvises the cash flow situation, then equipment leasing is an appropriate option. Make sure to take the time to understand the inherent business situation before making a decision.
Get in touch with our experts at Tata Capital to receive guidance on various tailor-made leasing structures to suit unique business requirements.
09 August 2021
5 mins read
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