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How to Buy
Ten Reasons to Finance
| Financing | Buying | |
|---|---|---|
| Cash | Preserves cash for higher yielding investments. | Consumes cash. |
| Impact on financial statements | Favorable impact for certain structures on financial ratios (current ratio and debt-to-equity). Rental payments are simply footnoted on balance sheet. | Equipment booked as an asset. Requires depreciation schedules. |
| Income statement | Favorable impact on profitability ratios (return on assets). | Equipment ownership generally increases the expenses over the life of the asset. |
| Budgetary considerations upgrades | Payments are typically made from the operating budget. Allows companies to acquire needed equipment when capital budgets are exhausted or frozen. | Equipment purchases typically made from capital budgets, which require additional approvals. New equipment cannot be acquired if capital budgets are exhausted or frozen. |
| Equipment disposal | Eliminates uncertainty of remarketing or disposal of old equipment. Equipment can simply be returned at the end of the lease. | Companies must comply with strict environmental regulations when disposing of equipment, which can be costly and time consuming. |
| Financing | Buying | |
|---|---|---|
| Expected life uncertainty | Purchase equipment at end of the lease term at fair market value or extend the lease if the equipment still has a useful life. If not, the equipment can simply be returned to lessor. | If the equipment cannot be re-deployed, companies are faced with the costs of disposal or recycling. |
| Obsolescence protection | Companies can upgrade during the lease term and have a number of options at the end of the lease term, including simply returning the equipment. | Companies may require new technology at shorter intervals than depreciation schedules allow. Acquiring new equipment may result in a book loss. |
| Simplicity | Provides one-stop shopping for total solutions. Financing typically requires fewer internal approvals than a capital purchase. | Purchasing typically requires internal approvals from capital budget committee. |
| Flexibility | Financing provides more options during the term and at termination. Equipment can be upgraded or swapped during the term if desired. | Upgrading equipment may be more difficult if capital budget approvals are required. There are no options to swap or return the equipment. |
| Leading edge | Maintaining leading edge technology is simpler with financing since companies do not own the equipment directly. | Companies must redeploy, remarket, or dispose of existing equipment while acquiring new technology. |
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