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View Full Version : Question to our business consultant


Steve
07-01-2005, 11:33 AM
Joel,

A question came up recently where an LCO asked if he should buy his equipment with cash and remain debt free or buy on credit.

Also when do you propose to lease equipment vs purchase equipment?

mowboy
07-04-2005, 07:57 PM
Another good question... should I buy equipment on credit or remain debt free and if I use credit - should I lease or purchase?

I drew on my own experience and also did some research to provide the following answers to these questions. First, should you use credit.

The short answer is that if you do not have the money to buy all the equipment you need then just buy the essentials. *Use some of your profits to gradually build your business, buying more equipment as you need and can afford it. If you don't even have enough for the essentials... wait.

Now to explain that in a bit more detail. There some exceptions which I'll talk about in a minute but for new LCOs, avoid going into too much debt as you start out your business. As part of your planning you have probably come up with a list of the equipment you would like to buy, but what if you cannot afford it all? Break the list down into essentials and 'nice-to-have'. For example a mower and string trimmer are essential whereas an aerator and power hedge trimmers are nice-to-have. Can you afford the essentials? Can you purchase used equipment and then afford the essentials? If not, the advice is to bide your time, save your money and plan for your grand entry into the market a little later. Not having enough capital to sustain your business, or having poor cash flow are leading reasons for business failure so you would not want to get off on the wrong foot by going over your head in debt.

When should you use credit? You may need to use credit to acquire bigger ticket items such as vehicles, trailers or large commercial mowers. Again, if you are just starting out then, if possible, avoid credit and buy used. If you choose to borrow however, carefully examine the terms of the loan/lease. Know what your breakeven point is each month - how much cash do you need to cover you overhead. Avoid easy credit, high interest options because you will pay too much in the end. Ask yourself - and ask the dealer - how much does the equipment really cost, after all the interest. The results may surprise you and force you to reconsider your options.

Finally to the question of when to lease and when to purchase. It depends but to help you decide, consider some of the pros and cons to leasing.

Pros

- Leasing is one way to acquire equipment without the need for an initial cash outlay. Usually there is little or no down payment and the monthly payments are less that you would pay for purchasing.

- There are less stringent financial requirements. It is usually easier to obtain financing via a lease than it is with a purchase.

- Leasing provides a better tax advantage because lease payments are an expense and can be written off 100% each month. Compare this to purchasing where your equipment depreciates and hence you can only write off a portion of the equipment cost each year.

- As well, there may be benefits with regard to maintenance. Check with the dealer as to what types of maintenance and warranty there is on the equipment.


Cons

- Leasing costs more in the long run if you choose to buy the equipment.

- You never own the equipment so you cannot use it for collateral or list it as an asset on your books. If you decide not to buy it then you must return it after the lease term is up.

- Leases are often non-cancelable. If you get into trouble, you may be in an very unfortunate and costly situation.

Weigh the options carefully when leasing or using credit. Read the small print and get legal advice before signing long term agreements.

I hope this helps you to decide what to do.

Steve
07-05-2005, 03:02 PM
Great Information, I am sure others will appreciate reading that!

Thank you!

Steve
08-26-2008, 09:03 PM
I wanted to bring this post back to everyones attention as they start looking to purchasing or leasing equipment.

From your experiences which have you preferred to do? Lease or purchase?