Newspaper article THE JOURNAL RECORD

Leasing Can Help Keep Cash Flow in Balance

Newspaper article THE JOURNAL RECORD

Leasing Can Help Keep Cash Flow in Balance

Article excerpt

One way to reduce cash outlay for certain products is to take advantage of leasing. Depending on your cash-flow situation and the kind of lease you negotiate, the pros of leasing can far outweigh the cons.

If your credit is good, your down payment should not total more than the first and last months' payment. This ties up much less money than if you bought the item outright and financed the purchase.

But suppose your credit isn't that good and a substantial down payment is required. Your monthly payments can be reduced through what is called "capitalized cost reduction," which means that the money the leasing company has tied up in the product is reduced by the amount you have paid in. Since your monthly payments will be based on the amount of capitalized investment, the rent should be proportionately less than if you had not made the down payment. If this reduction isn't offered, be sure to fight for it. Another aspect to consider is the ultimate useful life of the leased equipment to the buyer. Capital goods that tend to become technically obsolete best lend themselves to an equipment lease. Equipment leases commonly run for five years. Five-year bank loans on equipment, on the other hand, are not nearly as common. The net result of the lease, of course, is to spread the cash outlay over a longer time and ease the burden on your company. Taxes are a consideration here, however. Since a lease is for a fixed period, determine whether you can derive cash flow benefit from, in effect, depreciating the item through a lease over a shorter time than permitted for a purchase. For example, you might decide that, for tax purposes, you don't want to buy equipment with a five-year life because it has a three- year life under a lease. Consequently, under the lease, you can write it off over three years. In this case, the higher cost of the lease payments would be better financing after considering the cash flow from the shorter tax write-off period. Quicker write-off may more than offset the interest factors going the other way. …

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