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Cash-strapped businesses should consider leasing, rather than buying, the new equipment they need to upgrade existing operations or to grow their business. According to the U.S. Department of Commerce's Bureau of Economic Analysis, more than 80% of all businesses lease some or all of their equipment. Many of these businesses turn to leasing not because they are short on cash but because they understand how leasing can be used as an integral cash flow strategy.

Businesses that lease include industrial firms, trucking companies, commercial printers, and even hospitals and other medical firms that use x-ray machines and similar equipment. Leasing affords you access to many types of equipment from copy and fax machines to delivery trucks, construction equipment and more.

With the rapid rate of improvements in technology, we're seeing an especially significant jump in the number of businesses who are choosing to lease computer and communications technology, instead of purchasing, in order to avoid the risk of still owing money on outdated and legacy technology.

Equipment Leasing Basics

The Equipment Leasing and Finance Association (ELFA), an industry trade group in Arlington, Virginia, explains the benefits of equipment leasing this way:

When you lease equipment, a manufacturer, dealer or lender either buys or already owns the equipment you want. In exchange, you make monthly payments to the owner (lessor). The monthly payment structure allows you to treat the payments as tax- deductible business expenses.

If you need equipment right away, leases are approved much more quickly than loans and involve less paperwork and more relaxed credit requirements.

Maintenance of equipment is another expensive issue for most companies and another reason for leasing. Leasing is especially advantageous to a business that is not in the business of maintaining the machinery it uses.

Ultimately, if cash flow is an important issue, then Equipment Leasing is an attractive alternative.

Lifecycle Leasing

Leasing makes it easier to keep up with the pace of technology. This can be especially important if your business relies upon cutting-edge technology such as the latest computers, communication devices or other equipment. In many cases, a series of short-term leases (Lifecycle Leasing) can cost you less than buying new equipment every year or two. As a result, lifecycle leases are becoming the trend right now in leasing. This type of lease offers upgrades to equipment that has become outdated or obsolete.

If a manufacturing firm develops a new product line, for example, and needs machinery that is bigger or better, most leasing companies can accommodate the switch. High-tech users can stay current with hardware and software upgrades at pre-determined intervals.

Different Flavors of Leasing

When you start comparing lease options, make sure you understand the different types of leases so you aren't comparing apples and oranges.

An Operating Lease is a lease for which the lessee acquires the property for only a small portion of its useful life. This type of lease is commonly used to acquire equipment on a short-term basis. An operating lease is not capitalized; it is accounted for as a rental expense.

In contrast, a Capital Lease is a lease that is classified as a purchase by the lessee by meeting one of the following criteria: the lease term is greater than 75% of the property's estimated economic life; the lease contains an option to purchase the property for less than fair market value; ownership of the property is transferred to the lessee at the end of the lease term; or the present value of the lease payments exceeds 90% of the fair market value of the property.

For greater detail about leases and their tax implications, see FASB- 13

About the Author: Michael Moss has served his clients as Founder and President of MDS Funding, LLC since 1995. By providing working capital and equipment leasing financing, he improves the cash flow of businesses (B2B and healthcare).