53 (8) (2001), p. 48.
JOM is a publication of The Minerals, Metals & Materials Society
Leasing or buying—which is better? Isn’t it always better to be an owner? The
answer: sometimes. According to oil baron Paul Getty, “If it appreciates, buy
it. If it depreciates, lease it.” Getty’s thoughts are words to live by for
the metalworking industry. There are many benefits to both buying and leasing,
depending on the type of property involved.
Businesses have two property types— real and personal. Real property encompasses buildings and other permanent structures, and the land on which they stand. Personal property includes furniture, fixtures, and equipment—everything from shelving to desks. Buying is often most beneficial when financing real property, because it will appreciate and gain value over time. Owning real estate—and the structures on it—is almost always a good investment for the long haul. Property owners build equity and reap the benefits of the property’s increasing value.
However, shops are heavily comprised of machinery—which is in the category of personal property and, therefore, depreciates in value over time. What’s more, technology is always changing, systems are always improving, and the equipment needs to be updated and replaced every few years. For everything that needs to be replaced every few years, therefore, leasing is very often the best option.
Another decision facing the metal-working industry is trust. Can a lender be trusted to help with crucial buying-versus-leasing decisions? Which lender is the most qualified to tailor the best financing solution for a particular business?
Many important factors must be considered before deciding upon a lender. Among them:
Buying land and buildings is a very traditional, natural process, and purchasing
equipment, especially large, capital items, has historically been the main—or
only—option available. However, leasing equipment is becoming the mainstay
in the industrial sector, and progressive businesses are reaping the benefits.
One of the main advantages to leasing is it allows businesses to upgrade or improve without making a substantial, upfront investment. The large down payment traditionally required for a property purchase can be prohibitive. Leasing eliminates that burden by providing 100 percent financing, which facilitates making upgrades or changes on a regular basis. By freeing up working capital, shops can invest in their businesses as desired.
From a management perspective, leasing simplifies budgeting because if offers a set payment every month. In addition, lease financing may be structured to appear off balance sheets, so it eliminates liability associated with property. Therefore, leasing, which provides a viable alternative to bank financing, helps businesses manage their bank-leverage ratios.
Another advantage to leasing is its flexibility—a lease can be modified as often as necessary for a business to remain competitive. In addition, leasing terms are developed based on the useful life of the asset. These terms are advantageous because at the end of the agreement, the property can be returned or replaced for new equipment.
Virtually all kinds of equipment can be leased—from production equipment to office computers. Several types of leases are available, and they can be combined or mixed and matched, based on needs.
A capital lease, which is recorded on the books as debt, falls under liabilities. A capital lease allows 100% of the cost of new equipment to be financed, and it can be extremely useful for many asset types— especially soft assets.
Unlike a capital lease, an operating lease is not recorded on the balance sheet; it is not a liability but can be used as an asset. It is recorded in the notes of a company’s financial statement. This kind of lease helps enhance return on equity.
With a true lease, the lessor takes the depreciation benefit associated with purchased equipment. In turn, the lessee may benefit with a lower annual percentage rate. A non-true lease, however, allows the lessor to retain the tax benefits of the equipment, but the financing rates may be higher.
So whether your goal is to acquire, build, upgrade, refinance, or grow, simply remember Paul Getty’s rule of thumb. At the end of the day, smart financial decisions today will help to strategically position your enterprise for the uncertain economic future.
Karen Pomazal is assistant vice president of Heller Financial.
For more information, contact Karen Pomazal, Heller Commercial
Equipment Finance, 500 West Monroe Street, Chicago, IL 60661; (866) 243-5537;
Direct questions about this or any other JOM page to email@example.com.
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