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I Didn’t Know I Had Options?


When it comes to making asset and equipment procurement decisions how many of your SME clients would be honest and say “I didn’t know I had options”. Many go straight for the “chequebook” (remember them!), others automatically draw down on a line of credit or overdraft and some think about leasing.


Aligning your clients’ finance strategies with their business goals is paramount, and starts with choosing the right type of funding. Each has its benefits and implications for your client’s business, so when they are making their choice, they must consider how the finance product will be treated in their financial statements.


It is worth noting a straight cash purchase using a business’ existing funds may be more expensive than the lease or loan/buy options because of the loss of use of the funds. Besides, most small firms don’t have large amounts of cash needed for major capital asset acquisitions.


A loan is ideal for collateral you want to own at the end of the term; something that holds its value past the life of the agreement. A lease is best for something that depreciates quickly - like technology - and will not hold its value past the term.


One important distinction between a lease and a loan is how the finance charges are paid. With a loan, the interest is amortized throughout the term. In other words, you are paying more interest at the beginning and more principal at the end. Leasing finance charges are fixed throughout the term and are not paid separately from the borrowed amount.


Lease Characteristics

  • One fixed monthly payment

  • Non-cancellable

  • Good for equipment that loses value

  • Inclusive of soft costs (installation, training, implementation)

  • No advance payment or deposit required

  • No impact on bank lines

  • Easy to upgrade or add equipment throughout the term


Loan Characteristics

  • Interest amortizes with more due at the beginning and less at the end

  • Rates can fluctuate and are tied to prime and economic factors

  • The client owns the equipment when the loan is paid off

  • The bank can put liens on client assets as collateral

  • Ties up client’s business credit line and limits

  • Limits client’s ability to borrow for other investments

  • Requires a down payment or deposit

  • Inconvenient to upgrade or add additional equipment as needed

  • Can be a rigorous approval and underwriting process

  • Clients with less established credit records may face higher rates

The costs of the lease versus purchase issue can be analysed through a discounted cash flow analysis. This analysis compares the cost of each alternative by considering:

  • the timing of the payments

  • tax benefits

  • the interest rate on a loan

  • the lease rate

  • other financial arrangements

The analysis involves making certain assumptions about the economic life of the equipment, scrap (or salvage) value, and depreciation.


Such analysis can be effective in the negotiation of the final pricing or, if there is no significant difference in the economics, it can aid in management’s consideration of qualitative or other business factors in the final decision.


Ultimately, this small business accounting decision must consider a number of factors that business owners should discuss with their trusted Finance Professional.


These factors include:

  • Unique cash flow needs of the business

  • The creditworthiness or the business's ability to obtain financing

  • The need for new technology in day-to-day operations

  • Applicable tax incentives

  • Understanding the pros and cons as they apply to the business's current situation


Considerations and Conclusions


From a financial perspective, the comparison of the Net Present Values of the costs of purchasing to the costs of leasing provides a conclusion. However, several assumptions should be considered and factored into your recommendations and the decision the business makes.


Some points of consideration include:


  • Could the business use the purchase deposit for other business purposes?

  • How long might the asset be usable (if at all) after the period used in the comparison?

  • Would second-hand equipment be a better purchase/lease option?

  • Is technology going to make the equipment redundant sooner?

  • Have interest rate and tax benefits been properly factored in?


If all these considerations have anything in common, it’s that there isn’t a one-size-fits-all solution in terms of buying versus leasing. Business owners may have an idea of what will work best for their business; however, they should seek advice from Finance Professionals who can look at the big picture and offer guidance.


It is worth noting a straight cash purchase using a business’ existing funds may be more expensive than the lease or loan/buy options because of the loss of use of the funds. Besides, most small firms don’t have large amounts of cash needed for major capital asset acquisitions.



Ultimately, both an equipment lease and a bank loan help your client obtain the equipment their business needs. The ability to pay over a series of months can be much more amenable than committing to a large, upfront cost. Maintaining working capital, hedging against inflation, and forecasting with ease are the benefits.


The Business Finance Certification positions you as an SME Finance specialist, so you can help your clients succeed and prosper. For more information go to


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