How to Perform a Lease vs. Buy Equipment Analysis

Businesses have difficulty raising capital - that's no secret. This difficulty (among other reasons) has caused many to look at leasing as an alternative financing arrangement for acquiring the use of assets. All types of equipment leasing-from motor vehicles to computers, from manufacturing machinery to office furniture-have become more and more attractive.

This guide describes various aspects of the lease/buy decision. It lists advantages and disadvantages of leas­ing and provides a format for comparing costs of the options.

What Is a Lease?

A lease is a long term agreement to rent equipment, land, buildings, or any other asset. In return for most-but not all-of the benefits of ownership, the user (lessee) makes periodic payments to the owner of the asset (lessor). The lease payment covers the original cost of the equipment or other asset and provides the lessor a profit.

Types of Leases

There are three major kinds of leases: the financial lease, the operating lease, and the sale and leaseback.

Financial leases are most common by far. A financial lease is usually written for a term not to exceed the economic life of the equipment. You will find that a financial lease usually provides that:

Periodic payments be made,

Ownership of the equipment reverts to the lessor at the end of the lease term,

The lease is noncancellable and the lessee has a legal obligation to continue payments to the end of the term, and

The lessee agrees to maintain the equipment.

The operating lease, or "maintenance lease," can usual­ly be canceled under conditions spelled out in the lease agreement. Maintenance of the asset is usually the responsibility of the owner (lessor). Computer equip­ment is often leased under this kind of lease.

The sale and leaseback is similar to the financial lease. The owner of an asset sells it to another party and simultaneously leases it back to use it for a specified term. This arrangement lets you free the money tied up in an asset for use elsewhere. You'll find that buildings are often leased this way.

You may also hear leases described as net leases or Kross leases. Under a net lease the lessee is responsible for expenses such as those for maintenance, taxes, and insurance. The lessor pays these expenses under a gross lease. Financial leases are usually net leases.

Finally, you might run across the term full payout lease. Under a full payout lease the lessor recovers the original cost of the asset during the term of the lease.

Kinds of Lessors

As the use of leasing has increased as a method for businesses to acquire the use of equipment and other assets, the number of companies in the leasing business has increased dramatically.

Commercial banks, insurance companies, and finance companies do most of the leasing. Many of these organizations have formed subsidiaries primarily concerned with equipment leasing. These subsidiaries are usually capable of making lease arrangements for almost anything.

In addition to financial organizations, there are com­panies which specialize in leasing. Some are engaged in general leasing, dealing with just about any kind of equipment. Others specialize in particular equipment, such as trucks or computers, for example.

Equipment manufacturers are also occasionally in the leasing business. Of course, they usually lease only the equipment they manufacture.

Advantages of Leasing

The obvious advantage to leasing is acquiring the use of an asset without making a large initial cash outlay. Compared to a loan arrangement to purchase the same equipment, a lease usually

requires no down payment, while a loan often requires 25 percent down;

Requires no restriction on a company's financial opera­tions, while loans often do;

Spreads payments over a longer period (which means they'll be lower) than loans permit; and

Provides protections against the risk of equipment ob­solescence, since the lessee can get rid of the equipment at the end of the lease.

There may also tax benefits in leasing. Lease payments are deductible as operating expenses if the ar­rangement is a true lease. Ownership, however, usually has greater tax advantages through depreciation. Naturally, you need to have enough income and resulting tax liability to take advantage of those two benefits.

Leasing has the further advantage that the leasing firm has acquired considerable knowledge about the kinds of equipment it leases. Thus, it can provide expert technical advice based on experience with the leased equipment.

Finally, there is one further advantage of leasing that you probably hope won't ever be of use to you. In the event of bankruptcy, claims of the lessor to the assets of a firm are more restricted than those of general creditors.

Disadvantages of Leasing

In the first place, leasing usually costs more because you lose certain tax advantages that go with ownership of an asset. Leasing may not, however, cost more if you couldn't take advantage of those benefits because you don't have enough tax liability for them to come into play.

Obviously, you also lose the economic value of the asset at the end of the lease term, since you don't own the asset. Lessees have been known to grossly underestimate the salvage value of an asset. If they had known this value from the outset, they might have decided to buy instead of lease.

Further, you must never forget that a lease is a long-term legal obligation. Usually you can't cancel a lease agreement. So, it you were to end an operation that us­ed leased equipment, you might find you'd still have to pay as much as if you had used the equipment for the full term of the lease.

Since the owner of Your company you deal with problems in an almost daily basis. Being comfortable with powerful Problem Solving
Techniques can radically alter the growth of your business.

Even though you Find answers to your problems, many businessmen and women aren't really proficient in the methods of problem
solving, and if solutions neglect, they mistake themselves for misjudgment. The issue is typically not misjudgment but instead a
lack of ability.

This guide Educates you in a few problem solving processes. Critical to the success of a company faced with issues is your
understanding of what the issues are, defining them, finding answers, and selecting the best solutions for the situations.

What's a problem. A dilemma is a situation that presents difficulty or perplexity. Issues are available in many shapes and sizes.
For example, it can be:

Something did Not work as it should and you don't understand why or how. Something you will need is unavailable, and something
must be found to take its place. Workers are undermining a new program. The market isn't buying. What do you do to live? Customers
are complaining. How can you manage their complaints?

Where do Issues come from? Problems arise from each facet of human and mechanical purposes as well as from nature. Some problems
we cause ourselves (e.g., a hasty decision was made and the wrong person was chosen for the job); additional problems are brought
on by forces beyond our control (e.g., a warehouse is struck by lightning and burns down).

Problems are a Natural, everyday occurrence of lifestyle, and so as to suffer less from the tensions and frustrations they cause,
we must find out how to deal with them in a rational, logical manner.

If we accept The simple fact that problems will appear on a regular basis, for many different motives, and from an assortment of
sources, we can: learn how to approach problems from an objective point of view; find out how to anticipate some of these; and
stop a number of them from becoming larger problems.

To accomplish This, you need to learn the process of problem solving. Here, we'll instruct you in the fundamental methods of
problem-solving. It is a step-by-step guide that you may easily follow and exercise. Since you follow this guide, you will
eventually develop some strategies of your own that function in concert with all the problem-solving process described within this
guide.

Remember, However, as you read this is not a thorough analysis of the artwork of problem-solving but rather a sensible,
systematic, and simplified, yet powerful, method to approach problems considering the limited time and advice most company owners
and managers possess. Additionally, some problems are so complex that they require the further help of specialists in the field,
so be ready to accept that some issues are beyond just one person's ability, skill, and desire to be successful.

To be able to Appropriately recognize the issue and its triggers, you must do some research. To do so, just list all the preceding
questions in checklist form, and maintaining the checklist useful, go about gathering as much information as you possibly can.
Keep in mind the relative importance and urgency of the issue, in addition to your time constraints. Then interview the folks
involved with the problem, asking them the questions on your own checklist.

After you've Gathered the information and reviewed it, you will have a pretty clear comprehension of the issue and what the major
causes of the issue are. At this point, you can research the causes farther through observation and extra interviewing. Now, you
should outline the problem as briefly as possible, list all of the causes you have identified, and record all the regions the
problem appears to be affecting.

Now, You're prepared to check your understanding of the problem. You've already identified the issue, broken down it into each of
its aspects, narrowed it down, done research on it, and you're avoiding typical roadblocks. On a large mat, write down the issue,
including each of the variables, the areas it affects, and what the consequences are. For a better visual understanding, you may
also want to diagram the issue demonstrating cause and effect.

Study what you Have written down and/or diagrammed. Call on your employees and talk about your investigation together. Based on
their opinions, you may decide to revise. As soon as you think you completely understand the causes and effects of the problem,
summarize the issue as succinctly as easily as you can.

Go through your Long list of alternatives and cross-out those who obviously won't work. Those notions aren't wasted because they
influence on these thoughts that remain. To put it differently, the best ideas you pick may be revised based on the thoughts that
would not work. With the remaining solutions, use what is called the"Force Field Analysis Technique." This is fundamentally an
analysis technique which breaks down the solution into its positive results and negative effects. To do this, write each solution
you're considering on a separate piece of paper. Below the solution, draw a line vertically down the middle of the paper. Label
one column advantages and one column downsides.

Now, some more Analytical thinking comes in to play. Assessing each facet of the solution and its influence on the problem,
listing every one of the benefits and disadvantages you may think of.

One way to help You think of the benefits and disadvantages is to role-play every solution. Call in a few of your workers and
perform out each alternative. Ask them to their own reactions. Based on what you observe and on their opinions, you'll get a
clearer idea of the benefits and drawbacks of each alternative you are thinking about.

Once you Complete this procedure for every solution, select those options which have the Most advantages. At this point, you
should be considering only three or two.

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