What is your company’s lease and equipment financing Strategy?
Based on your company’s industry and financial strategies will you decide on the type of lease financing to invest in.
Additionally, accountants are educated on the benefits of an operating lease and a capital lease structure. Some of the factors involved in equipment financing include; life of product, industry obsolescence and innovation, term of lease options and, financing costs. Heavy long-life equipment will provide material payback when the product is ‘owned’ and paid off while continuously earning revenue long after it’s complete ownership has been realized. On the other hand, committing to for instance a software package lease option – fully leasable, that may or may not have software updates may be financially more practical utilized in an operating lease – not ever owning it.
As for deciphering between capital and operating lease here are the usual determinants, a quick guide so to speak. You decide which meets your strategy; In a capital lease the term of the lease is >75% of the equipments estimated life, there is an option to buy the leased equipment for less then it’s estimated marketable value at the end of the term and, your lease payments are greater than 90% of its marketable value.
Most industry start-ups will make their decision on capital vs. operating lease strategies based on risk and cash-flow estimations. This is normal and often difficult to debate because of the company’s liquidity and unpredictable cash-flow, I understand this. As for the matured or maturing companies, their choice accounting leasing method will be either strategy based or a defence mechanism. Tax implications, industry type, financing costs are all considerations in a lease financing plan. Review your capital lease options and take advantage of an experienced financing advisors expertise.