To lease or not to lease.

• Position: Office equipment

Knowing whether to buy or lease equipment can help your business stretch its operating budget.

Whether to buy or lease equipment has become a fundamental financial question of the 1990s. Should you buy office equipment or should you lease? Should you replace all your computers for the newest models, upgrade them or lease them? Should you lease your business vehicles, or is it better to buy them up front? If you do lease, what type of lease arrangement is best? Which method provides better tax advantages? These questions are being seriously considered by many business managers who want to stretch their dollars.

Focus on Finance

Lease finance is a method of financing an asset by which the customer or lessee agrees to use a specific piece of equipment and make monthly payments on it for a predetermined length of time. At the end of the period, the equipment is returned to the lessor, or depending on the agreement, it can be purchased by the lessee.

Although there are many kinds of lease programs and the terminology used can be somewhat overwhelming, two of the most common programs are the operating lease and the financial lease.

An operating lease is normally used for items needed for a short time - that is, equipment not kept for its whole useful life. Telecommunications devices, high-tech equipment and automobiles usually require an operating lease. Be aware that monthly payments usually do not cover insurance, maintenance or repair costs. A full-service operating lease will cover these costs, but will also be more expensive. Check with the vendor before signing this type of lease.

A financial lease, also called a capital lease, is used when the lessee plans to keep the asset for a long time, often the life of the equipment. Because the lease period is longer, the lessee benefits from lower monthly payments. Financial leases generally do not provide for services or maintenance and cannot be canceled.

Building Benefits

You can gain a number of economic advantages from leasing. These include:

* Leasing offers substantial advantages to businesses that do not have the cash on hand to finance a particular piece of equipment while better utilizing the company's cash resources for other purposes.

* Leasing can provide tax advantages. Lease payments can be deducted as a business expense every month. In contrast, when an item is bought, the purchase payments are either deductible one time as a business expense or depreciated over a period of time...