Lease Or Buy

Dear Dave
Our 18-member engineering/survey firm is growing quickly and cash flow is becoming a real problem for us. We are profitable, but it seems like every day we are faced with coming up with the funds to buy another computer, or more software, or field equipment for our survey crew. We’ve been told rather than use or own funds, or take out a loan from a bank, we’d be better off leasing major equipment. Any comment?
ET UT

Dear ET
You need to see your accountant for assistance. Any decision to lease or buy requires a careful analysis based on your specific situation including tax status, and your firm’s current and anticipated financial circumstances.

Having said that, leasing sometimes is a viable consideration as it can provide an additional source of capital without cutting into the amount of money you might otherwise be capable of borrowing from your bank for other company financing needs. On the downside, leasing is often more expensive than a conventional bank loan as the leasing company will usually assume items like computers and field equipment will have no residual value by the end of the lease. Therefore, your lease payments will be high enough and long enough to capture 100% of the cost of the item plus interest and other leasing fees making it similar to a bank loan albeit you would not need to come up with the down payment a bank may require as a condition of any loan.