Equipment Leasing vs. Traditional Financing

Maintaining a healthy cash cushion is a fundamental practice in business. Having readily available funds offers numerous advantages, especially during periods in which credit markets are tight.

Proper management of funds is crucial for seizing unexpected opportunities and safeguarding credit line availability for emergencies.

Financial consultants and accountants widely agree that leasing represents one of the most effective strategies for optimizing operating capital. However, it’s important to compare your options before deciding how you will procure new equipment for your business.

Excedr has been in business for over ten years but offers more than 30 years of experience leasing equipment to laboratories of all sizes.

In this article, we will lean on our experience as a trusted lessor and our network of financial advisors and industry veterans to comprehensively compare leasing and more traditional approaches, such as purchasing lab equipment with cash, bank loans, or lines of credit.

Leasing vs. Cash Purchase

Leasing and purchasing equipment with cash have distinct differences across various criteria. Let's compare them based on the following factors:

Upfront Costs

• Leasing: Leasing typically requires a minimal upfront cost, with the option of spreading payments over the lease term.
• Cash Purchase: Purchasing with cash requires a substantial upfront investment to acquire the equipment outright.

Repayment Term

• Leasing: Lease terms are usually flexible, ranging from a few months to several years, depending on business needs.
• Cash Purchase: There is no repayment term since the equipment is bought outright. Can be quite expensive due to annual service contracts (~15% of MSRP).

Effects on Credit & Future Borrowing Ability

• Leasing: Leasing preserves credit lines and borrowing capacity, allowing businesses to allocate credit resources for other needs.
• Cash Purchase: Purchasing equipment with cash may deplete available credit lines, limiting future borrowing capacity.

Effect on Operating Capital

• Leasing: Leasing helps preserve operating capital as it requires lower upfront costs and spreads payments over time.
• Cash Purchase: Cash purchases impact operating capital significantly, as a substantial amount is invested upfront.

Accounting Treatment

• Leasing: Lease payments are often treated as operating expenses, potentially providing tax benefits.
• Cash Purchase: The equipment is considered a capital asset and is subject to depreciation over its useful life.

Payments

• Leasing: Lease payments are fixed and predictable throughout the lease term.
• Cash Purchase: No recurring payments are involved after the initial cash outlay.

Tax Benefits & Impacts

• Leasing: Lease payments may be tax-deductible as operating expenses, reducing taxable income.
• Cash Purchase: Depreciation expenses and potential tax deductions may be applicable, but no recurring deductions from cash payments.

Speed of Approval

• Leasing: Lease approvals can be faster and more streamlined compared to securing financing for a cash purchase.
• Cash Purchase: The process of using cash for purchasing equipment is typically straightforward.

Financial Statements & Tax Returns

• Leasing: Leasing arrangements may result in simpler financial statements and tax returns, as lease payments are treated as operating expenses.
• Cash Purchase: Cash purchases require more detailed financial statements and may involve depreciation calculations.

Equipment Obsolescence

• Leasing: Leasing allows businesses to upgrade to newer or more advanced equipment easily, avoiding equipment obsolescence.
• Cash Purchase: Cash purchases may result in owning equipment that could become obsolete over time.

Which Is the Better Choice?

Leasing offers advantages like lower upfront costs, preserved credit and borrowing capacity, preserved operating capital, potential tax benefits, and the ability to upgrade equipment.

Purchasing with cash provides ownership from the start but requires a significant upfront investment and may impact credit lines and operating capital.

Leasing vs. Bank Loan

A bank loan is a typical financing option for businesses purchasing lab equipment. With a bank loan, businesses can secure the necessary funds to acquire the equipment outright.

The loan amount is typically determined based on factors like creditworthiness, collateral, and repayment ability. Bank loans offer businesses the advantage of immediate equipment ownership, allowing them to use it without ongoing monthly payments.

However, it’s important to note that bank loans require businesses to repay the loan amount with interest over a predetermined term, which can impact cash flow and tie up capital. They can also be challenging to secure and may come with burdensome terms that may negatively affect businesses.

A bank loan provides a straightforward method of financing lab equipment purchases while considering the long-term financial commitment and impact on working capital. Let’s compare it to leasing based on the same factors as before:

Upfront Costs

• Leasing: Leasing typically involves lower upfront costs, as businesses make regular monthly payments.
• Bank Loan: Bank loans require a down payment, which can range from a percentage of the equipment's value to a fixed amount. This down payment is an immediate upfront cost in addition to any associated loan origination fees or closing costs.

Repayment Term

• Leasing: Lease terms are flexible, with options ranging from short-term to long-term agreements.
• Bank Loan: Bank loans have fixed repayment terms, typically ranging from several months to several years.

Effects on Credit & Future Borrowing Ability

• Leasing: Leasing does not heavily impact credit lines, allowing businesses to preserve borrowing capacity for other needs.
• Bank Loan: Securing a bank loan or purchasing with cash may tie up credit lines, limiting future borrowing ability.

Effect on Operating Capital

• Leasing: Leasing minimizes the impact on operating capital, as businesses make manageable monthly payments.
• Bank Loan: Bank loans have a significant impact on operating capital since a substantial amount is paid upfront.

Accounting Treatment

• Leasing: Lease payments are often considered as operating expenses, providing potential tax benefits.
• Bank Loan: Equipment purchases are treated as capital assets and may involve depreciation calculations.

Payments

• Leasing: Lease payments are fixed and spread over the lease term.
• Bank Loan: Bank loan payments include both principal and interest, with a fixed payment schedule.

Tax Benefits & Impacts

• Leasing: Lease payments may be tax-deductible, reducing taxable income and providing potential financial benefits.
• Bank Loan: Depreciation expenses and potential tax deductions may be applicable but are not tied to ongoing payments.

Speed of Approval

• Leasing: Lease approvals are typically faster and more streamlined compared to securing a bank loan.
• Bank Loan: Bank loan approvals involve a thorough evaluation process, which may take longer.

Financial Statements & Tax Returns

• Leasing: Leasing arrangements may result in simpler financial statements and tax returns due to the treatment of lease payments as operating expenses.
• Bank Loan: Bank loans and cash purchases may involve more detailed financial statements and depreciation calculations.

Equipment Obsolescence

• Leasing: Leasing allows for equipment upgrades, avoiding the issue of equipment obsolescence.
• Bank Loan: Purchasing equipment with a loan may result in potential obsolescence.

Which Is the Better Choice?

Like the comparison between leasing and making a cash purchase, leasing offers lower upfront costs, preserved credit and borrowing capacity, preserved operating capital, potential tax benefits, and equipment upgrade options.

Bank loans provide immediate ownership but may have higher upfront costs, tie up credit lines, and require careful financial planning. It may also take longer to receive approval, and can effect your future borrowing ability.

Leasing vs. Line of Credit

A line of credit is a flexible financing option for businesses acquiring lab equipment. It offers a predetermined credit limit that can be accessed as needed.

Unlike traditional loans, businesses can borrow funds gradually, providing better management of cash flow. The revolving nature of a line of credit allows companies to repay and reuse funds, making it ideal for ongoing equipment needs.

Repayment terms can typically be customized, offering the choice of interest-only or principal and interest payments, aligning with revenue cycles. A line of credit also serves as a safety net for unexpected expenses or emergencies in the dynamic laboratory research field.

Responsible use is crucial, monitoring borrowing and repayment to avoid excessive debt and interest costs. Building a positive credit history and nurturing the relationship with the financial institution can lead to higher credit limits and favorable terms.

Let's compare leasing to using a line of credit to acquire new equipment using the same criteria.

Upfront Costs

• Leasing: Typically involves lower upfront costs, as businesses make fixed monthly payments instead of a lump sum.
• Line of Credit: Offers flexibility in upfront costs, allowing businesses to borrow funds as needed, potentially resulting in higher upfront costs if the full amount is borrowed.

Repayment Term

• Leasing: Involves a fixed repayment term agreed upon in the lease agreement, providing predictable monthly payments.
• Line of Credit: Offers flexibility in repayment terms, allowing businesses to choose interest-only or principal and interest payments, adjusting repayment based on cash flow.

Effects on Credit & Future Borrowing Ability

• Leasing: Leasing equipment does not impact credit lines or borrowing ability, allowing businesses to preserve credit capacity for other needs.
• Line of Credit: Utilizing a line of credit reduces available credit and may affect future borrowing capacity, depending on the credit limit and utilization.

Effect on Operating Capital

• Leasing: Leasing preserves operating capital by spreading the equipment cost over time, allowing businesses to allocate funds to other areas.
• Line of Credit: Utilizing a line of credit may impact operating capital, as borrowed funds need to be repaid, potentially limiting available cash for other expenses.

Accounting Treatment

• Leasing: Lease payments are generally treated as operating expenses, providing potential tax benefits and easier accounting treatment.
• Line of Credit: Borrowed funds are not treated as expenses, and interest payments may have different accounting implications.

Payments

• Leasing: Requires fixed monthly payments for the duration of the lease term.
• Line of Credit: Payments vary based on the borrowed amount and repayment terms chosen by the business.

Tax Benefits & Impacts

• Leasing: Lease payments may be tax-deductible as operating expenses, providing potential tax benefits for businesses.
• Line of Credit: Tax implications may vary, depending on how the borrowed funds are used and the interest payments made.

Speed of Approval

• Leasing: Leasing arrangements typically have faster approval processes compared to obtaining a line of credit, as they are specifically designed for equipment acquisition.
• Line of Credit: Obtaining a line of credit may require more extensive documentation and approval processes, potentially taking longer to secure.

Financial Statements & Tax Returns

• Leasing: Lease payments are reflected in financial statements and tax returns as operating expenses.
• Line of Credit: Borrowed funds and interest payments may have different reporting requirements, depending on the specific financial situation.

Equipment Obsolescence

• Leasing: Leasing allows businesses to upgrade to newer equipment at the end of the lease term, mitigating the risk of equipment obsolescence.
• Line of Credit: Equipment obsolescence is not directly addressed by using a line of credit, as it depends on the business's purchasing decisions.

Which Is the Better Choice?

The choice between leasing and utilizing a line of credit for equipment acquisition depends on a business's specific needs, financial situation, and future plans.

Ultimately, leasing can offer advantages over using a line of credit. It preserves credit lines, reduces upfront costs, provides predictable payments, simplifies accounting, and offers potential tax benefits. Leasing also has a faster approval process.

Having said that, careful evaluation is always necessary to align your choice with your long-term goals. Both options offer advantages and considerations, and you should carefully evaluate these criteria to determine the most suitable approach for your equipment needs.

The Importance of a Healthy Cash Cushion

Maintaining a healthy cash cushion refers to having an adequate amount of readily available funds or liquid assets that a business can access when needed. This cushion serves as a financial safety net and provides several significant benefits:

1. Emergency Expenses: Unexpected emergencies or unforeseen expenses can arise at any time. A healthy cash reserve allows a business to address these situations promptly without disrupting operations or relying on additional external funding sources. It provides a sense of financial security and stability.
2. Business Opportunities: Opportunities for growth, expansion, or investment can arise suddenly. These opportunities may require immediate access to funds to seize them. With a cash cushion, businesses can take advantage of favorable circumstances without external financing, ensuring agility and competitive advantage.
3. Credit Line Availability: Keeping cash reserves intact helps preserve the availability and flexibility of credit lines; during tight credit markets, where lending may be limited, or interest rates may be unfavorable, having credit lines available can serve as a vital lifeline for short-term financing needs or unforeseen circumstances.
4. Financial Stability: Cash reserves buffer against economic instability or downturns in the business cycle. They provide stability and confidence in meeting ongoing financial obligations, such as payroll, rent, and other fixed expenses, even during challenging times.
5. Negotiating Power: A healthy cash cushion enhances a company’s negotiating power. It allows businesses to negotiate better terms with suppliers, secure discounts for bulk purchases, or negotiate favorable payment terms, ultimately contributing to cost savings and improved profitability.

Maintaining a healthy cash cushion is a prudent business practice that provides financial security, flexibility, and the ability to capitalize on opportunities, and ensures that a business can navigate through unforeseen circumstances and make strategic decisions without being overly reliant on external financing or risking financial instability.

The Significance of Preserving Credit Lines for Other Needs

Preserving credit lines for other needs holds significant importance for businesses due to the following reasons:

1. Financial Flexibility: Credit lines provide businesses with a flexible source of funding that can be accessed whenever necessary. By preserving credit lines, companies retain the ability to tap into this financial resource for various needs, such as working capital requirements, expansion plans, marketing initiatives, or unforeseen expenses. It offers the flexibility to address immediate needs without resorting to more restrictive or expensive forms of financing.
2. Emergency Situations: Unforeseen emergencies or financial setbacks can occur in business operations. Preserving credit lines ensures businesses have a readily available safety net to address such situations quickly and efficiently. It eliminates the need to go through the lengthy process of applying for new credit or seeking alternative funding options during times of urgency.
3. Seasonal or Cyclical Fluctuations: Many businesses experience fluctuations in their cash flow due to seasonal or cyclical variations. Preserving credit lines can help bridge the gap during lean periods when revenues or expenses are low. It allows businesses to maintain operations and meet financial obligations without interrupting their activities or jeopardizing relationships with suppliers, employees, or customers.
4. Investment Opportunities: Preserving credit lines opens up opportunities for strategic investments. It enables businesses to seize favorable investment prospects promptly without delays associated with securing new financing. Whether it’s acquiring another company, investing in new technology, or pursuing growth initiatives, preserving credit lines ensures the availability of funds for capitalizing on these opportunities.
5. Contingency Planning: Preserving credit lines is a crucial element of contingency planning. By accessing additional funds, businesses can proactively prepare for unforeseen circumstances, economic downturns, or industry-specific challenges. It provides a cushion that helps mitigate risks and navigate through challenging periods without putting undue strain on cash reserves or resorting to costly emergency funding options.

Preserving credit lines for other needs provides businesses with financial flexibility and the ability to address emergencies, capitalize on investment opportunities, navigate fluctuations, and engage in effective contingency planning.

It ensures that companies have a reliable and accessible funding source to support their ongoing operations, growth aspirations, and resilience in the face of unexpected circumstances.

In Conclusion

Leasing is becoming a preferred option for many business owners, especially those who want to preserve their budgets while acquiring new lab equipment for their facilities. Unlike outright purchasing, leasing enables the lessee to use the equipment without assuming full financial ownership. To conclude this post, let’s review the advantages of leasing lab equipment:

• Substantial cost savings
• Flexibility
• Simplified maintenance and repairs
• Potential tax advantages

First and foremost, leasing offers substantial cost savings for businesses. Instead of a significant upfront investment, leasing allows for manageable monthly payments, preserving valuable cash reserves.

This advantage is particularly beneficial for small and medium-sized businesses or startups with limited capital, as it provides access to high-quality lab equipment without straining finances or sacrificing other business priorities.

Flexibility is another key advantage associated with leasing lab equipment. Leasing agreements often include options for upgrading to newer or more advanced equipment as technology evolves. This ensures businesses can stay at the forefront of scientific advancements without the complexities and financial burden of selling and repurchasing equipment.

Maintenance and repairs are simplified through leasing arrangements. Many leasing agreements include equipment maintenance and support provisions, relieving businesses of associated responsibilities and costs. This streamlined approach enables companies to focus on their core activities while ensuring the equipment remains properly serviced and in optimal condition.

Additionally, leasing lab equipment may offer tax advantages in certain jurisdictions. Lease payments are often considered operating expenses and may be tax-deductible, potentially providing financial benefits for businesses.

By opting for a leasing arrangement, businesses can access cutting-edge equipment, preserve cash reserves, and concentrate on their core operations, ultimately driving efficiency and productivity in the laboratory environment.

While leasing may not be the ideal solution for every situation, its advantages make it an attractive option for businesses seeking optimal equipment acquisition strategies.

Lease with Excedr

Excedr's leasing program has proven to be a game-changer for companies who typically buy their lab equipment.

Through fixed and affordable monthly payments, our operating leases offer a practical and efficient solution that enables companies to meet their equipment needs without draining their cash reserves.

Our leasing program offers a practical solution in a dynamic business landscape, allowing businesses to face unexpected expenses without touching their cash reserves.

Experience the benefits of affordability and flexibility, and preserve financial resources by choosing Excedr’s leasing program for your lab equipment needs. Unlock the potential of your credit lines and position your business for success.