Cash Flow and Leasing

One of the most common pieces of advice given on business management websites when it comes to cash flow discussions is to lease your equipment.  The argument in favor of leasing is straightforward: the month-to-month cost for leasing equipment is substantially lower than buying it.

There's one key problem with this argument, though: leases put you into a never-ending cycle of payments, meaning that they are a somewhat smaller but never-ending drain on your monthly cash flow.

My advice when it comes to leasing for small business purposes is simple: use it as a tool in your repertoire, but only as a tool of last resort.

Before you lease, make sure you run through the following options.

First, do you actually need the item at all?  Many leased items are often merely unnecessary upgrades from currently-existing equipment.  If the current equipment meets your needs, stick with it until there is a true compelling reason to upgrade.

Second, are there used items that can meet your needs?  Recently, I wrote an OPEN Forum article about buying used office furniture.  Instead of leasing your furniture, survey the used furniture that's available.  You can quite often pick up office furniture that you'll own for the long term for the cost of just a month or two of leasing new furniture.

Third, what is the true cost of simply buying the item you're about to lease?   I have been involved in several potential leasing arrangements where the cost to finance and buy the equipment had lower monthly costs than the lease itself did.  While leasing is often the less expensive option, that's not always the case.  Be sure to contact multiple providers before signing up for a lease to ensure that the price you're getting actually does represent a substantial savings over simply financing the item.

Finally, are you getting the best leasing deal on the equipment you need?  You should always evaluate your needs before you talk to a salesman.  Know what you actually need and ignore the rest of the "features" that you'll rarely, if ever, use.  Don't get convinced to lease equipment that sounds good on paper, but only provides overpriced features that you're not going to utilize in your business.  Instead, go for the minimum cost that meets the needs you identified before the meeting.

Leasing can be a good option for businesses, but it's rarely the best option.  Keep your eyes open for alternatives before you take the leap into a leasing agreement, because you might just find that the lease is more expensive than your other options.