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Should My Company Lease Or Buy Long Term Assets?

Guest post by: Stan Prokop

Article Overview: The article discusses the business owners decision around leasing or purchasing long term business assets .

Should My Company Lease Or Buy Long Term Assets?

Most business owners and financial managers realize they can either purchase fixed assets out of equity, or finance those same assets on a long term lease.

Business owners need to focus heavily on the use of the asset. Any company that acquires assets has either a long term view of the asset or a short term view. Lease financing is an excellent method of financing long term assets.

From the company perspective a long term lease on the asset - typically 3-5 years, and sometimes longer, is simply a method of purchasing the equipment via a ' loan '. The company simply decides on which asset or assets they wish to acquire, and then negotiates a price with the vendor or manufacturer. Typically the company is either dealing with the vendor/mfr. or the captive finance firm related to that manufacturer.

Business owners are barraged with claims that ' leasing provides 100% financing ' or that it ' conserves capital '. More sophisticated business owners and financial executives know that long term leasing is in fact a solid mechanism for tax avoidance. Some people maintain that if corporate taxes disappeared long term leasing would disappear!

When a firm arranges leasing it of course uses the equipment, and makes fixed payments on that equipment. Business owners focus more often than not on ' using equipment ', not owning equipment. The user can though structure leases allowing them to purchase the equipment at end of term.

If a customer does not wish to acquire assets over a long length of time, and if those assets have a shorter useful economic life than a firm should consider an ' operating lease '. The company has the right to cancel the lease at the end of term, return the asset, etc. In long term asset financing the transaction cannot be cancelled.

If a firm utilized a purchase strategy for long term assets then the funds for those purchases come from equity shareholders. The company uses the asset, and it owns the asset. Many customers have a philosophy of ' pride of ownership ' and have long term histories of acquiring assets under a purchase strategy. If the company is properly funded this is of course an entirely viable option.

We would point out further that if the financial markets were ' perfect ' ( they are not!) the advantages of leasing would diminish. In that case the company would not have to consider legal costs, brokerage costs, and other miscellaneous fees. Leasing matters because there are no perfect markets - advantages gained by the lessee are at the expense of the lessor, and each company has a unique credit and risk profile.

In summary, each company has a unique financial structure and acquisition philosophy around financing and asset acquisition. Owners and managers must consider the optimal financing strategy for long term assets that best suits overall corporate needs.

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Article Tags: business asset acquistion, lease vs buy



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