Prudent
businesses often choose to lease rather than buy equipment,
vehicles and facilities. Leasing can be advantageous but the
type of agreement you sign is important.
When
presented with lease options, you'll find the ones with the
longest terms are generally the cheapest. But you may want to
opt for a short-term version instead. Why? If you should
experience a business downturn, a long-term lease can be the
shortest route to the poorhouse.
The risk of signing an extended deal is obvious. You're
stuck with years and years of stiff lease payments — and
maybe even penalties if you can't pay. To make matters worse,
the equipment and facilities might be obsolete or sitting idle
at your company while you're still writing checks.
To limit your exposure, consider negotiating short-term
leases. Make no mistake. You'll probably pay a higher lease
rate. But even if you end up paying more, it can be a prudent
way to limit your exposure in bad times.
You'd be surprised how many businesses are unnecessarily
encumbered in long-range leasing arrangements that end up
costing more money in the end.
Let's say you have an opportunity to lease a photocopy
machine for five years at $100 a month, or a total of $6,000.
Instead, you negotiate a month-to-month lease for the same
machine at $150 a month. Ultimately, it could be a much better
deal.
The reason: If you take
the long-term lease and the bottom falls out of your business,
you’ll be expected to continue making payments even though
there’s nothing to photocopy and no revenue coming in.
But if you hedge your bets by taking the short-term option,
you can walk away from the arrangement. If the business
recovers and the danger to your company passes, you can always
decide later to terminate the "expensive" short-term lease and
shop for a "cheaper" long-term arrangement.
Here's another consideration: If you lease
equipment 365 days a year, but only use it 180 days, you're
better off renting with a month-to-month lease at double the
daily rate of a long-term lease. Your cost is exactly the same
as leasing for 365 days, but there's no long-term obligation.
If you want to get out, you're off the hook.
The tax implications of leasing can be complex so call
Ronald J. Cappuccio, J.D.,
LL.M.(Tax) at (856) 665-2121 before
signing any deals.
