August 9, 2017 J Goehring

3 Reasons Why Companies with High Cash Reserves Still Choose to Lease

operating lease

The affordability of equipment, technology, and other hard assets can make or break a company’s growth. This is why leasing and operating lesases are so appealing to many businesses – acquiring these necessary items with a manageable monthly payment. Why then do established businesses with large cash reserves choose to lease, when they could just pay off the asset and avoid the interest? It turns out that there are quite a few benefits to financing for all types of organizations, from start-ups to Fortune 100s alike.

First… There are Tax Benefits

Leasing allows your customers to deduct monthly lease payments on a true lease as an operating expense. Depending on the lease structure and the accounting treatment, this means their lease may qualify for off-balance sheet treatment, which may assist them in acquiring the equipment they need while maintaining compliance with bank and loan covenants, staying within capital budget constraints, and  improving their financial position.

Another set of tax benefits many organizations take advantage of are Section 179, bonus depreciation, and qualified leasehold improvements. With Section 179, the IRS allows for the project cost to be fully deductible if your business uses the leased equipment and lease payments pay the cost over time. Interest as part of the payments is also deductible.

Bonus depreciation is the provision that allows businesses to expense a portion of an asset in the year it is added. This has proven to be very helpful for businesses with large amounts of qualifying equipment, as they can save large amounts of tax in the year of purchase.

Second… There are Budget Friendly Fixed Monthly Payments

Knowing that a fixed cost is on the horizon can be a relief to a company. One of the most difficult things about expense accounting month-to-month is factoring in the new, surprise costs that pop-up. That is why even when they can pay the full cost up-front, many businesses opt for monthly payments since they are expected costs that allow them to better manage their budgeting cycle.

Third… Leasing is a Hedge Against Technology

In an age when the next best thing may be available a month after you purchase the latest and greatest, there can be a fine line behind staying up to date and lagging far behind. This is one benefit that leasing can provide better than paying for assets outright. Depending on the structure of the financing agreement, many companies lease assets as a way to stay current with advancement, updates and new features on a regular basis. This usually proves easier than trying to sell the asset themselves at a loss, only have to turn around and buy something new at full price.

Since leasing is a hedge against technology, many businesses choose operating leases in which they have the option to return the asset at the end of the lease term. If the then fair market value of the asset is less than the residual that the business assumed, they bear the loss but are protected from fair market value fluctuations. Also, if the lessee chooses to swap the asset for one of newer technology, the existing lease can typically be terminated and a new lease initiated.

When You’re Ready to Start Leasing, KLC Financial is Here…

Companies need their technology and office solutions to keep up with them. KLC can help them with this challenge. Here are just a few ways we have already helped other companies:

Data Center Company:

Data center, network management, integration company, $525,000 lease line. KLC Financial provided an equipment lease line of credit for allowing Lessee to expand their data center offering and to update their technology.

Insurance Agency:

The company needed a $75,000 cash injection into the business to expand their agent training capacity. KLC Financial did a sale-leaseback of their office equipment and some personal assets to get them the cash they needed. They have grown their business over 30% so far.

Wholesale Clothing Facility:

We leased them an upgraded software package for $20,000 to help streamline their order processing and inventory management.

For more information about equipment leasing, contact the team at KLC Financial today.