Is equipment leasing right for my small business?
Leasing is a type of financing that allows you to acquire equipment without tying up your cash. But is it the right option for your SME? Follow our guide to make the best decision.
As an SME owner, you know how important it is to manage your cash flow strategically. You may need funds to seize a business opportunity, deal with an unexpected expense, or hire staff.
If your business operates in an industry such as agriculture, landscaping, construction, transportation, or healthcare, you rely on equipment or machinery worth tens or even hundreds of thousands of dollars. You might consider leasing to access this equipment through simple monthly payments – but is this the right option for you?
The answer depends on several factors, including your SME’s stage of development, your business model, and your risk tolerance. Here are some questions to help you make an informed decision.
Is your revenue cycle predictable?
Some SMEs have regular cash inflows, while others depend on demand that fluctuates from month to month or season to season. If you find it difficult to forecast your revenue over the medium or long term, you should take this into account when managing your cash flow and prioritize financial commitments that offer greater flexibility:
- Is your business model based on a steady workload or on one-off projects?
- Is your revenue cycle cyclical, seasonal, or subject to fluctuating demand?
- Does a long-term financial commitment pose a risk for you?
If your cash reserves are limited and your income is inconsistent, a lease will have less of an impact on your cash flow than a sudden large expense. Additionally, you can choose payment terms that align with your revenue cycle, whether that means monthly, annual, or semi-annual payments. If your business is seasonal, you could even concentrate your payments in the months when you generate more profit.
Does your equipment give you a competitive edge?
Your machinery and equipment are essential to your day-to-day operations. It can also help your business stand out from the competition. Ask yourself if this is the case for your SME:
- Does the quality of your equipment affect the safety of your workforce, the quality of your products, or your customers’ trust?
- Could outdated equipment put you at a disadvantage compared to your competitors?
- Should you invest in the latest technologies to stand out in your industry?
Leasing gives you access to equipment that you might not otherwise be able to afford. For a small additional fee, you can upgrade to a higher-quality model or add additional features. If your equipment plays a key role in your SME’s competitiveness, leasing could be a good option.
Do you prefer to own your equipment?
Buying expensive equipment also means taking on the responsibility that comes with it. In addition to ensuring it’s properly maintained and repaired if it breaks down, you’ll need to sell it if it no longer meets your needs or becomes obsolete. You’re also required to record these assets on your balance sheet and calculate their annual depreciation.
- Would you like to own your machinery and equipment despite the administrative burdens, or would you prefer to focus your energy on other activities?
- Do you plan to use your equipment over the long term, or do you rely on rapidly evolving technologies that are at risk of becoming obsolete?
Leasing gives you access to the equipment you need without the burdens of ownership. For example, if you need to acquire technology that’s likely to become obsolete quickly, you might opt for a shorter lease term, which gives you the flexibility to upgrade to a newer version when the time is right.
Is financial flexibility an asset for your SME?
Many companies are looking for strategies to optimize their cash flow. This financial flexibility allows them to adapt to unforeseen circumstances and invest in their growth.
- Do you need to act quickly to address certain situations, whether it’s a shortage of inventory or staff, equipment failure, or a business opportunity?
- Are you anticipating major changes within your company, such as an expansion, acquisition, or transition?
- Are you planning any other significant investments in the near future?
By replacing large, one-time expenditures with periodic payments, leasing preserves your cash flow for other priorities. This allows you to keep all your options open and gives you the flexibility to make the best decisions for your business.
What stage of development is your SME in?
Your equipment needs will differ depending on whether you’ve just started your business or have been operating for several years. The same applies to your cash flow.
Here’s how leasing can be beneficial, depending on your business’s stage of development:
Your SME is just getting started
You need to invest in new equipment but may not have the cash on hand to do so. You also don’t have the credit history or collateral required to secure a loan. With rare exceptions, leasing has the advantage of requiring no down payment, which allows you to preserve your working capital for day-to-day operations and unexpected expenses.
Your SME is growing
You need to acquire additional equipment to support your increased productivity. However, it’s best to preserve your cash flow for business expansion, opening new branches, or hiring staff. Leasing helps your business grow rather than holding it back.
Your SME is well established
To boost your SME’s efficiency and ensure it remains competitive, you need to replace aging equipment. You have the cash on hand to purchase similar models, but leasing would allow you to test new technologies or more efficient equipment. If your current equipment has retained its value and is fully paid off, you can generate cash flow by selling it to a finance company. This is known as a sale-leaseback.
Under what circumstances is leasing the wrong option?
Leasing isn’t necessarily the best option for your business. Think twice if:
- Your equipment generally has a long service life and a low risk of becoming obsolete.
- Your business operations are stable and your revenue is consistent.
- You prefer to own your equipment and avoid long-term contractual obligations.
In these cases, buying or taking out a loan might be a better fit for your needs.
How do you make an informed decision?
Just like purchasing equipment or taking out a loan, leasing has its pros and cons. Take the time to consider each of these options to choose the one that best suits your needs. Keep your business goals, risk tolerance, and growth plan in mind.
Here are some other questions you might ask yourself to help you make your decision:
- How many years will your equipment last, and how long do you plan to use it?
- What are the consequences if your needs change down the line?
- How does this decision affect your business’s growth?
If you think leasing is right for your SME or would like advice, contact us today to discuss your options.
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