News From the Louisville SBDC
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It Takes Money to Make Money!
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If I had a Million Dollars...
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A Look at Leasing
• 100 percent financing: Many business leases come with 100 percent financing terms, which means no money changes hands at the inception of the lease. Can you imagine what a boon to cash flow this can be?
Well, it’s not totally cash-free, because the lessee has to make the lease payments each month. But many times the assumption is that the company will be making the payments from future cash flows — in other words, from enhanced revenues that the company earns because of the lease.
• Obsolescence: Another advantage to leasing is working around obsolescence, which means the company anticipates frequently replacing the fixed asset. For example, many larger clients lease rather than purchase their computer equipment so they can stay current with new and faster computer processing technology.
• Flexibility: Asset flexibility is another leasing advantage. Based on the relationship between the lessor and the lessee, the lease may be for either just a few months or the entire expected life of the asset.
• Tax advantages: Separate from any tax benefit a company may gain, lease payments can reduce taxable income in a more appropriate manner than depreciation expense. Remember that you treat operating leases like rentals by exspensing the entire lease payment when the business makes it.
Before you get all excited about paying fewer taxes, there’s usually only a timing difference in taxes paid with leased versus purchased assets. Basically, taxes saved today will eventually have to be paid tomorrow.
• Off-balance-sheet financing: Finally, operating leases provide off-the-books (or balance sheet) financing. In other words, the company’s obligation to pay the lease, which is a liability, doesn’t reflect on the balance sheet. This can affect a financial statement user’s evaluation of how solvent the company is because he will be unaware of the debt—hence the importance of footnotes to financial statements.
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