Published February 6, 2019 | Updated May 27, 2022
Conserving cash is one of the most important aspects of running any business. It only makes sense to manage cash closely and commit it wisely. That’s always been a challenge, given all the competing demands on this critical resource, but it’s even harder now as businesses grapple with the ongoing effects of the pandemic.
Even when a business has more than sufficient cash to cover working capital requirements, surplus cash is typically placed in reserve for critical and unexpected business emergencies. Cash not only provides the points for the scorecard of business, but it is the lifeblood of business as well.
Existing lines of credit can be just as important. Many businesses rely on their credit lines to augment variations in cash flow due to seasonal shifts in business volume or when it’s necessary to ramp up production or inventory to meet changes in demand. Credit used in this manner becomes a part of the day-to-day cash management strategy of the business and is often not earmarked for capital investment unless the need is very critical. Additionally, even when interest rates are low and credit is relatively cheap, as they are now, financial managers may still resist increasing current lines of credit in favor of carefully managing those that are already in place.
In order to conserve cash and preserve credit, it is not uncommon for businesses to delay the acquisition of equipment, software, and related services that might clearly help them operate more efficiently but that don’t quite meet the standard of “critical emergency.” Even though improved efficiencies will yield increased profits over time, paying for the equipment or software dips too deeply into cash reserves or reduces available credit below the established comfort level of management, and the acquisition is put off until a later date. Depending on how long the decision to acquire needed equipment is deferred, this approach often extends well past the usable life of existing equipment. By the time that equipment fails, the need to acquire new equipment will have reached emergency status.
Even though this scenario happens fairly frequently, it is entirely avoidable simply by using lease financing to acquire the new – or even used – equipment, software, and related professional services. Lease financing provides a multitude of benefits to a business intent on conserving cash and preserving credit in the face of the need for new, more productive equipment to become more profitable.
Lease financing has several major advantages over an outright purchase of equipment or software using cash reserves or existing lines of credit. The most obvious of these benefits is that cash and credit lines are left untouched so that they can be used as planned for emergencies or to augment working capital.
Beyond that, an equipment lease is a better method of acquiring equipment or software because it is so flexible. For example, lease payments can be structured to fit both the budget and cash flow needs of a business. This is particularly important when a business must contend with seasonal fluctuations in volume that impact revenue and available cash. An equipment lease payment schedule can be configured to accommodate these fluctuations so that lease payments do not further constrict cash flow during slower times.
A lease also provides options for the business at the end of the lease. A company can structure a lease to provide for full ownership of the equipment at the end. Or, at the other end of the spectrum, the company can simply walk away from it when the lease expires. Another option is to own the equipment at the end of the lease by paying fair market value when the term ends. Interestingly, many leases never make it all the way to the end because the equipment is upgraded at some point during the lease.
The ability to refresh equipment with a newer, more advanced model is a valuable benefit derived from leasing equipment instead of buying it. This is particularly true for technology products or other types of equipment that tend to evolve rapidly. Instead of purchasing a piece of equipment that quickly becomes outdated and soon thereafter becomes obsolete, the leasing customer simply turns in the existing equipment for the latest and greatest version.
Finally, an equipment lease can be structured to include far more than the equipment itself. Consumable supplies, parts, and even installation hardware are often included with the lease. The same applies to essential services such as installation, repair, and support. Leases can even include freight and the expert services necessary to design and deploy a comprehensive solution in just about any business. Leasing is literally an end-to-end financing solution that helps businesses conserve cash throughout the entire lifecycle of the equipment.