Lease commitments: Deciding whether to lease or finance new equipment purchases should be done in cooperation with your banking institution. Depending on potential financing covenants (restrictions), the addition of lease obligations can have significant implications to any pre-existing financing requirements. While an operating lease will not show on your balance sheet as a liability, there is still a “commitment” to make payments over the lease term. This commitment to payments is an important factor to most lenders and should be discussed before making any decisions.
Interest rates: Interest rates are a function of risk assumed by the lender. The more security a lender takes reduces their risk and, as a result, should reduce the reward and interest rate charged. If less security is required, the risk to the lender increases and so too does the required return and interest rate charged.
Timing of acquisition: The purchase of a piece of equipment allows for the full amount of CCA to be de-ducted from taxable income in the year of purchase, regardless of the timing during the year. For operat-ing and capital leases, only the lease payments paid during the year are deductible for tax purposes. This fact will impact the decision on whether the lease or purchase option provides the lowest overall cost. The example above assumes that the acquisition and leases were made at the start of the year.
A Final Word
Your decision on whether to finance or lease your next equipment acquisition is important. It involves numerous factors that will affect not only your current bottom line and tax position, but also has the po-tential to influence your company’s ability to obtain financing in future years. To ensure that you’re not limiting your company’s opportunities one should ensure that they consult their primary lending institu-tion. Ensuring you make an informed decision is crucial to your success.
Balkaran Dhillon CGA, LPA, CPA (Colorado), CA (India).
For more information, contact Balkaran Dhillon 1-888-625-0119 or email@example.com