• Thank you for visiting HeavyEquipmentForums.com! Our objective is to provide industry professionals a place to gather to exchange questions, answers and ideas. We welcome you to register using the "Register" icon at the top of the page. We'd appreciate any help you can offer in spreading the word of our new site. The more members that join, the bigger resource for all to enjoy. Thank you!

Purchase vs. Lease

Steve Frazier

Founder
Staff member
Joined
Oct 30, 2003
Messages
6,599
Location
LaGrangeville, N.Y.
What are the advantages/disadvantages of one method of purchase over the other? I leased a truck to purchase because I was told it would end up costing less in the end, but I believe it ended up costing me more in reality. Can we hear how this works?
 

John Banks

Well-Known Member
Joined
Sep 22, 2004
Messages
113
Location
Newtown, CT
Steve Frazier said:
What are the advantages/disadvantages of one method of purchase over the other? I leased a truck to purchase because I was told it would end up costing less in the end, but I believe it ended up costing me more in reality. Can we hear how this works?

It depends on the residual amount, or what the truck is worth, the buyout, at the end of the lease. Depending on the residual amount, and if you intend to purchase the vehicle at the end of the lease, yes, it can cost you more. Typically people do a lease to get a lower payment v. buying, again it depends on the residual. I bought a car years ago. Originally I was looking to lease it, but when the lease payment ended up being more than the purchase payment, it made no sense.

There are also leases, typically equipment leases, structured in a way to keep items off your balance sheet to, in some cases show a healthier balance sheet. Some terms offer certain tax advantages. It depends on the structure of your business and what you're looking to achieve, both financially and in the business overall.

I did the same as you with my F250. I originally did a 3 year lease back in 2000. My plan was to make the lower lease payment, then purchase the truck at the end of the lease. When the lease was up, I made the purchase. I have since sold the truck, a few months ago, but in the end, I paid more for the vehicle than I would have if I would have just bough it to begin with.

We still lease a vehicle for my wife, which she runs through her business. But with her, she doesn't want to have to deal with maintenance, reliability, etc, so for her it makes sense. For me, I don't think I'd do it again for my trucks and equipment.

Sorry to ramble, but I hope this helps Steve.
 

Finance Guy

Well-Known Member
Joined
Feb 21, 2006
Messages
48
Location
Seattle
Occupation
Financing
John has some good points... Let me throw out some questions and answers we are currently hear and answer.

WHY WOULD LEASING BE SMARTER THAN USING CREDIT LINES OR LOANS FROM THE BANK TO FINANCE OUR BUSINESS EQUIPMENT?

Good Question… Typically, lines of credit or bank loans look like a good deal at first glance. However, if you take a closer look at a typical equipment purchase with bank financing you may reconsider your options…

Let's talk about a few things bankers may neglect to tell business owners about equipment financing:

ONE
Bank loan products, while flexible on soft costs (i.e. freight, labor, accessories, etc.), usually require cash down. In some cases 20% to 30% of the equipment cost may be required up front. This will eat away at your business's working capital.

TWO
No matter the size of the transaction, banks usually require updated financial information and tax returns for your business as well as all owners of your business. This can delay equipment acquisition and result in lost income from equipment that isn't on the job.

THREE
A banking "relationship" may yield a quick loan turnaround if the proper documentation is on file, however, this may limit your borrowing power for future needs. Multiple equipment loans or exposure with a bank can halt your business's borrowing power in times of need or crisis.

FOUR
Bank loans will increase a business owner's debt ratio. When banks report lines of credit or installment loans to the credit reporting agencies, it adds debt to the business owner's personal credit profile. This can affect your ability to make consumer purchases, such as a car, home or investment property.

FIVE
A banker may suggest that a small business owner or proprietor take a home equity loan out for an equipment purchase. While this may seem like an easy solution, most accountants and financial advisors will advise against co-mingling personal assets for business use. In addition, the equity in your home is not available if you need it for a personal or family emergency.

SIX
When banks provide a business with a line of credit or loan they will frequently make the business owner sign paperwork that will include their entire business as collateral (accounts, inventory, receivables, equipment, assets, etc.). This means that if for any reason that payment is not made the entire business is at risk.

SEVEN
Bankers will be the last to tell you the advantages of leasing and "off balance sheet" financing. With a true lease it is possible for a business to fully expense lease payments as rental expenses. This can provide significant tax deductions for your business.

EIGHT
While it is important for your business to have a banking relationship, and a resource to borrow money from in times of need, it is also important to diversify financial relationships. Diversifying funding sources allows your business to take advantage of a variety of financing options or programs. This minimizes exposure to one financial institution and allows you the freedom to select the option that best meets your needs.

If there are any specific questions let me know. Every program I put together is formatted in the best interest of the business I am working with. I listen to my customers and do my best to help them to succeed, repeat customer's are a good indicator that you are doing a good job and have gained trust.

For those that are opposed to leasing we can put a straight finance program together.

FG
 

Finance Guy

Well-Known Member
Joined
Feb 21, 2006
Messages
48
Location
Seattle
Occupation
Financing
FYI

Comparing a car lease to an equipment lease is, well, let's say... Not comparable. At all!!!

FG
 

hillrancher

Active Member
Joined
Feb 3, 2006
Messages
25
Location
Eureka Springs, Ar
Occupation
owner
Being a small contractor it is almost impossible to lease and come out. I do lease, but never pays off. I lease purchase to make sure I need the piece of iron. I will lease a specialty piece. Lease to make sure it will make it payments and have leased to save taxes, but not sure of this angle. All I know about leasing the piece has to be used everyday to pay off and being a small contractor we don't use all our equipment every day.
 

Finance Guy

Well-Known Member
Joined
Feb 21, 2006
Messages
48
Location
Seattle
Occupation
Financing
I will put together some specifics and post, but for the meantime...

I can put together programs that you can skip payments, make no payments for 90 days, have smaller payments during "your slow time" of the year if need be and so much more. Try getting that from a straight purchase at your local bank. It sounds like most of you have not had a financing person sit down and listen to what you really need.

FG
 

Steve Frazier

Founder
Staff member
Joined
Oct 30, 2003
Messages
6,599
Location
LaGrangeville, N.Y.
hillrancher said:
....and have leased to save taxes...

This is the angle I was getting at with my first post. How are the tax advantages realized? The leases I'm referring to are with the intent to buy at the end of the lease, it's just viewed as a different method of financing the purchase. I was told in the long run it's cheaper with all things considered, but when I worked it out the interest rate was quite a bit higher than a regular loan would be.

Does the tax advantage overcome the higher interest rate?
 

Finance Guy

Well-Known Member
Joined
Feb 21, 2006
Messages
48
Location
Seattle
Occupation
Financing
Steve, to answer you question, Yes, the tax advantage overcomes the sometimes higher interest rate.

FG
 

Finance Guy

Well-Known Member
Joined
Feb 21, 2006
Messages
48
Location
Seattle
Occupation
Financing
And keep in mind that your credit score, time in business, net worth, etc. determines your rate, not the type of financing program you choose. I can guarantee that I will get you the best rate that you qualify for.

John Deere can advertise 0% programs but not everone will qualify for that...

FG
 

PSDF350

Senior Member
Joined
Oct 18, 2004
Messages
725
Location
Richmond NH
I'm leasing to buy like you are thinking Steve. Honestly if I had it to do over again I wouldn't. Just did taxes and it didn't do much for me. Also when they figuire intrest rate it isn't normal. I am not sure how exactly how it works but when I try and figuire it at the rate they say I am paying, my payment comes out far cheaper than what I am paying. Also if you are in the money and decide to buy outright you still pay all intrest. I relize I am no shinning example but if I want to pay off my skidder it is the same price as if I pay for the 3 years that lease is for. But you have been in bus alot longer than me (mine is considerd a start up.) So rate was much higher. And you will get better deal. Good luck.
 

John Banks

Well-Known Member
Joined
Sep 22, 2004
Messages
113
Location
Newtown, CT
PSDF350 said:
Also when they figuire intrest rate it isn't normal. I am not sure how exactly how it works but when I try and figuire it at the rate they say I am paying, my payment comes out far cheaper than what I am paying.

I haven't looked at a lease agreement in a while, but I think to get to the real interest rate, you multiply the money factor by 24, which will get you to the true apr or apy, whichever one is governed by truth in lending disclosures, i forget...
 

HDfatboy

New Member
Joined
Mar 29, 2006
Messages
2
Location
Oregon
PSDF350 said:
I'm leasing to buy like you are thinking Steve. Honestly if I had it to do over again I wouldn't. Just did taxes and it didn't do much for me.

I have been self employed since 1997 and did not discover equipment leasing until 2001 at the advice of my CPA who is good with this stuff (I'm not too bright). At first I financed everything with my bank. Eventually I outgrew what the bank would give me because everything I financed showed up on my personal credit report. All of that equipment and debt lowered my credit score a lot. That hurt me when I went to purchase my house and Harley. I am paying more on both of those now because of the amount of debt I was showing. Even though the debt was paid for by my company and I have never missed a payment. My leases do not show up on my credit report.

It was explained to me that there are a few different types of leases. The leases with a $1 at the end and you own the stuff gets written off like a regular bank loan (depreciation) and isn't the best taxes. I did a fair market value lease which I am writing off 100% of each payment as a "rental" expense per my CPA. I was scared about doing a fair market lease but the bank gave me a side letter stating the buy out would not be more than 10%. Basically I get back approx. 1/3 of each payment come tax time because I take all my lease payment off of my taxable income.

Hope this info helps.
 

stuvecorp

Senior Member
Joined
Jan 8, 2006
Messages
307
Location
lake wissota, wisconsin
The financing issues can be very frustrating. We have one loan that is a lease that the accountant isn't really sure what it is (that one was a mistake on my part - never seem to get enough work for that truck). The banks never want to loan money if you are self employed. I sold our skidsteer last spring and went in to check about financing the new one and they said that I can't afford it, even with over 25% down. Case credit must use that new fuzzy math.
 

HDfatboy

New Member
Joined
Mar 29, 2006
Messages
2
Location
Oregon
I asked my CPA last night why people either love or hate leasing equipment. His quote was "most CPA's do not know how to use a lease to the customers advantage and write them off like a typical loan because they don't really know what else to do with them". My CPA works mostly with contractors so he's done his research which pays off for my company big time.

He suggested to call your CPA and ask him/her about how to write off a lease. If they don't immediately go into detail...get another CPA. Your CPA should know YOUR type of business. I wish I would have met mine in the early years...you live...you learn.
 

Finance Guy

Well-Known Member
Joined
Feb 21, 2006
Messages
48
Location
Seattle
Occupation
Financing
HDfatboy.... YAY, Someone gets it!!!! Your CPA is smart. You posted good information. I can say that all day long but until someone like yourself that has figured it out will others take notice. There is a reason 90% of successful businesses LEASE their equipment.

Again, if anyone needs individual assistance I am here for you. I am the "Finance Guy", site sponsor and here to help your succeed.

FG
 

dirtboy

Member
Joined
Feb 9, 2008
Messages
12
Location
New York
How do payments compare on a lease to a regular purchase. I have been in bus. for 14 yrs. started with a small bachoe and a pick up. Now I have larger equip. but my biggest problem on a day to day basis is cash flow(like everyone else) Would a lease help my cash flow situation or is it purely a tax issue. Do you have any suggestions for this problem besides working sundays lol
 

Finance Guy

Well-Known Member
Joined
Feb 21, 2006
Messages
48
Location
Seattle
Occupation
Financing
Cash flow wise - A lease requires less out of pocket expense to start. The payments may be slightly higher than a straight bank LOAN; however, in the end after the tax advantages a lease actually costs you less. If you get a loan from a bank it shows up on you credit bureau and a lease will not. The advantage of a lease here is if you are having cash flow concerns and you go to your bank and apply for a bank loan for operating funds you possibly will get declined due to the fact that you have too much exposure (other loans) with them. The bank would not see that you have a lease and would approve you for an operating loan.

Hey Dirtboy... Take this Sunday off!!! :)
 

John C.

Senior Member
Joined
Jun 11, 2007
Messages
12,865
Location
Northwest
Occupation
Machinery & Equipment Appraiser
I've got a question about the end of a true lease.

Lets say the residual on a $100,000 machine at the end of a three year lease is $30,000 and the machine is only worth $20,000, who pays the difference?
 
Top