Pros and Cons of Lease Financing for Equipment

Leasing is a super financing alternative if you are seeking funding to obtain business equipment. Finance companies, banks, and many firms that sell high-priced equipment will lease to you.

When you lease an item, the lessor retains ownership of it. You use the equipment by virtue of the monthly payments you will be required to make. You can often purchase the equipment at the end of the lease term for its market value or less.

Lease Financing Can Make Dealing with the Bank Easier

A great advantage to leasing is that it may informally be considered “off the balance sheet.” Accounting rules in the U.S. now require you to capitalize on your balance sheet the value of leases, but if you are putting together informal financials for a very small business, you could just acknowledge your lease obligations in footnotes.

Let’s say a supplier is considering whether to extend credit to you, or a bank is weighing a loan proposal you have submitted. The lease commitment may be viewed as less onerous than other financial debts.

Banks also tend to consider their total exposure when lending to small businesses, and unless you have a sizable enterprise, they will expect you to do your banking exclusively through them. This limits your total borrowing ability. However, a banker will generally be understanding if you get lease financing through a third party. And they may not reduce their maximum lending exposure to you at all, so leasing could therefore increase your total borrowing ability.

This is very important if you have a relatively small business without a strong financial position. In any case, though, do keep your bank informed regarding any significant lease commitments you are considering prior to actually signing any agreements.

What If I Don’t Plan on Buying Any Expensive Equipment

You may still be able to benefit from lease financing. For example, maybe there is a piece of equipment you can get someone else to buy and then lease back to you. Once, when I was short of cash and the bank was breathing down my neck, I got my attorney to buy my old typesetting machine and lease it back to me. The amount was small to my attorney and the interest rate was high, but I needed every penny I could get. In fact, my attorney said to me after he treated me to breakfast at a local restaurant, “The only problem with this deal is we just ate the entire profit.”

Don’t have old equipment you can lease back? What about your personal car? Maybe you can sell it and then go lease one.

Takeaways You Can Use

  • Lease financing can make your business appear to be less leveraged to bankers and other people evaluating your credit.
  • Leasing is often a great alternative to getting a bank loan.
  • You might be able to turn your old equipment into cash by entering into a lease back arrangement.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.