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Equipment: Lease or Loan?

Posted by Inc. Mar 27, 2014

One of the most common cash-flow considerations business owners face is making the right choice between leasing or buying equipment. There are plenty of good tools available to help you analyze the decision on a dollars-and-cents basis—such as this Excel template and this online calculator, but often there are non-financial factors that must be considered as well.


Making the right buy-vs.-lease decision requires an understanding of some basic characteristics and how they affect cash flow and asset management, says Tim Lemmons, a business consultant and educator at the University of Nebraska-Lincoln. Leasing generally entails a smaller initial outlay of capital than buying does, and lease payments are often lower than traditional installment loan payments, resulting in less liability on the balance sheet. However, when you buy a piece of equipment you gain asset value on the balance sheet, and that value may be used as collateral against other loans. Owned equipment does not require a security deposit as leased equipment often does, so capital that would have been tied up for the duration of the lease is available for other purposes.


There are three major kinds of leases: financial, operating, and sale/leaseback.

  • Financial leases
  • Operating leases
  • In a sale/leaseback scenario, often used for buildings and other commercial property, you sell an asset you own to another party and immediately lease it back for a set period of time. The capital that would otherwise have been encumbered by the asset is freed up for use elsewhere in your business.


In most head-to-head scenarios, buying equipment usually ends up costing less than leasing it, as long as you can take advantage of associated tax benefits, particularly the Section 179 deduction, which essentially allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. However, two of the most attractive aspects of Section 179 expired at the end of 2013. Unless Congress acts to change the law, the limit on capital purchases eligible for the 179 deduction and the maximum deduction allowed drop from $2 million and $500,000, respectively, in 2013 to $200,000 and $25,000 (plus an adjustment for inflation) in the current tax year. In addition, the 50 percent bonus depreciation allowed for tax year 2013 has also expired.


The least-vs.-buy decision is one that can only be made on a case-by-case basis, and making that choice is only the start of the process. If you decide leasing makes the most sense, you need to choose your leasing company carefully. Choosing the right financial partner if you decide buying is the best option is just as important.


Article provided by Inc. © Inc.

Content created exclusively for Bank of America.



Opinion remains sharply divided on whether the Affordable Care Act (ACA) will turn out to be good, bad, or inconsequential for American businesses, but it is now the law of the land and has an impact on businesses of all sizes. Those least affected by tax, regulatory, and reporting issues are businesses with fewer than 50 full-time equivalent employees (FTEs), although they do face additional requirements in reporting and tax withholding. Companies with fewer than 25 FTEs also face minimal additional duties from ACA, plus they may be eligible for significant tax credits if they provide health care coverage for their employees.


The Small Business Health Care Tax Credit may be the most interesting aspect of ACA for companies with fewer than 25 employees, says Jeffrey Ingalls, president of The Stratford Financial Group, an insurance consulting and brokerage firm, and author of Healthcare Reform Made Easy. In order to claim the credit, a business must cover at least 50 percent of the cost of single (not family) health care coverage for each of its employees, and those employees must have average annual wages of less than $50,000, a figure that will be adjusted for inflation beginning this year. Additionally, employers will have to purchase insurance through the Small Business Health Options Program (SHOP) Marketplace to be eligible for the credit for tax year 2014 and subsequent years.


Businesses in states that have set up their own exchange sites can purchase qualifying insurance coverage through those sites (click here to see if your state has a site). Launch of the federal government’s SHOP Marketplace for businesses in states that don’t have their own site has been postponed until November, but businesses can still qualify for the 2014 credit by enrolling their employees in coverage through an agent, broker, or insurer that offers a certified SHOP plan and has agreed to conduct enrollment according to Department of Health and Human Services standards.


While ACA does not mandate businesses with fewer than 50 FTEs to provide health care insurance to their employees, it does impose notification requirements on any employer covered by the Fair Labor Standards Act (FLSA). (In general, any firm that has at least one employee and at least $500,000 in annual dollar volume of business is covered by the FLSA.) Those businesses must provide notification to their employees about the new Health Insurance Marketplace where employees can obtain coverage on their own. Most people are required to have basic health coverage as of January 1 of this year or be subject to a penalty. Businesses covered by the FLSA must also inform their employees that they may be eligible for a premium tax credit if they purchase coverage through the Marketplace, and they must advise employees that if they purchase a plan through the Marketplace, they may lose the employer contribution, if any, to any health benefits plan offered by the employer. A sample notice for employers who do not offer a health care plan is available here; as is one for employers who do offer a health plan is available.


ACA also requires any business, regardless of size, that offers a health insurance plan to its employees to provide employees with a standard “Summary of Benefits and Coverage” form explaining what the plan covers and how much it costs.    Likewise, all employers are responsible for withholding the increased portion of Medicare Part A Hospital Insurance that ACA imposed on employees with incomes of more than $200,000 for single filers and $250,000 for married joint filers as of January 1, 2013. The law increases the employee portion from 1.45 percent to 2.35 percent on wages in excess of those thresholds, but the employer portion of the tax remains unchanged at 1.45 percent.


Article provided by Inc. © Inc.

Content created exclusively for Bank of America.

“Capital structure” is a phrase that often comes up when professional investors, analysts, and pundits discuss the current state and future prospects of publicly traded companies. But every business, no matter how large or small, has a capital structure, and it’s important for business owners to understand this concept and what it means for them. Simply speaking, capital structure is about the ratio of different types of capital being used by a business. Debt and equity are the two most common sources of capital for most businesses, but a third type, hybrid securities, combines some aspects of the first two.


Debt financing involves a contractual agreement between a company and a third party that calls for payment of a predetermined claim (interest) regardless of the company’s operating performance. Interest payments are generally tax-deductible, and debt has a fixed life. Bank loans, commercial paper, and corporate bonds are examples of debt financing. Equity financing is permanent because it involves exchanging a share of ownership in the business in exchange for capital. Examples include owners’ equity, venture capital, and common equity (stock. It often provides for the payment of dividends, which generally are not tax-deductible. Hybrid securities share some characteristics of both debt and equity, with the most common type being a convertible bond, which can be converted to equity at a predetermined time and conversion rate.


The optimal capital structure (OCS) for any business is a mix of liabilities and equity that meets all its business objectives at the lowest cost to the business while adhering to all regulatory requirements and allowing for the adoption of relevant industry best practices and appropriate risk management. Formulating OCS can be a complicated undertaking for large, diversified organizations, but the basic steps involved in the process are the same for any business:

  • Define the capital needed and the business objectives. This is necessary to determine whether there are any elements of the business plan that may dictate parts of the capital structure.
  • Identify regulatory restrictions to make sure the capital structure you are planning will be in compliance with all applicable rules and regulations, both local laws affecting all commercial enterprises and industry-specific ones affecting the field in which you operate.
  • Identify risk restrictions, including liquidity (your ability to meet maturing obligations as they come due), interest rate risk on debt that does not have a fixed rate, and exchange rate risk if you operate in more than one country or plan to.
  • Identify the range, amount, and cost of funding instruments available. Many variables can affect the options available to you, including the legal structure of your company, the market(s) where you operate, and the regulations to which your business is subject.
  • Build the optimal capital structure, that is, fill any capital need identified with the lowest-cost funding instruments available to you as determined in the previous step.
  • Analyze the total financial cost of the OCS by estimating its weighted average cost of capital (WACC), which is the sum of each funding instrument’s after-tax cost multiplied by the percentage of the total capital structure it represents.


OCS for most growth-oriented companies will focus on internal over external financing, says Iqbal Ashraf, CEO of consulting firm Mentors Guild. “In general, avoid external funding, and if you have to raise external funding, get as much debt as you can service through at least one year of bad business.” Debt is easier to raise and cheaper than equity, and it leaves control of the business intact with the owners. The main risk of high debt is repayment when cash is tight, which can give you sleepless nights, lower the possibility of further financing, “and may even put your business at risk,” he says.


“Try equity after you are leveraged to your board’s comfort level or the industry average, whichever is higher, and get it from those who bring more to the table than just cash,” Ashraf adds. “Get ready for scrutiny, CPAs, and lawyers, and be prepared to share your profits in perpetuity.”


Optimizing capital structure can be a challenge even for those with a sophisticated financial background, but getting a grasp of the fundamentals is important for any business owner. A great resource that provides an easily understandable dissection of the concept and the process for achieving it is Optimizing Capital Structure Toolkit, a step-by-step guide with sample spreadsheets created by Women’s World Banking.


Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.


Article provided by Inc. © Inc.

Content created exclusively for Bank of America.


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