The Real Cost Of Paying Cash
Why Leasing is Less Expensive Than Paying Cash
One of the many myths that the average business owner believes is that paying cash for capital equipment is more cost effective than leasing equipment. In reality, leasing capital equipment instead of paying cash is the more affordable choice 99% of the time.
Pretax and Post-Tax Dollars
The first step in understanding the benefits of leasing equipment over paying cash is to understand how taxation plays into the equation. When a business pays cash for a piece of equipment, they are essentially paying with "post-tax dollars." While a business may have the cash on hand to acquire equipment, paying with post-tax dollars is essentially like adding 34% to the sale price.
Leasing, on the other hand, allows you to use "pretax dollars" when paying for equipment. Within the structure of a true lease, the leasing company owns the equipment and you are agreeing to a long-term rental agreement. Your lease payment can therefore be written off as an expense.
For every dollar you spend on equipment when paying cash, your actual cost is $1.34. Since every lease payment is tax-free, a dollar costs exactly $1.00.
Time Value of Money
When considering the cost benefits of equipment leasing, business owners must keep the "time value of money" in mind. The key element here is inflation. Today's money is worth more than tomorrow's money. Therefore, leasing allows business owners to retain stronger dollars today while making lease payments with weaker dollars in the future.
Working Capital and the Cost of Capital
Conservative estimates state that the average return on working capital is 10%. When you pay cash for equipment you immediately lose this opportunity. Because most capital equipment acquisitions are regarded as income generating investments, leasing allows you the opportunity to generate a greater return on working capital while enjoying the income generated by your equipment or software. You get the best of both worlds when taking advantage of an equipment or software lease.
Calculate the tax benefits of leasing on your upcoming equipment or software acquisition. Use the spreadsheet below to estimate the amount of money you can save by leasing vs. paying cash.
Leasing vs. Paying Cash
To learn more about the advantages of equipment leasing and financing, click on the link below and schedule a consultation with your very own Business Financing Funder (BFF).