Buy, Lease, Rent: Some Thoughts To Consider

Hi:
In my years in the credit business I have come across numerous instances involving farms to construction companies, medical offices to restaurants in which the type of financing did not suit the particular business. In the restaurant business, where the profit margin is very slim, in many instances, the restaurateur should have been leasing the equipment instead of buying it. There are several reasons for this: the first one is how quickly restaurant equipment depreciates. Restaurant equipment has little or no value once it is removed from the restaurant and almost no resale value. By leasing the equipment, the restaurateur frees up more operating capital which is sorely needed in the business. In farming there is usually one major problem with equipment purchases. Farming equipment is incredibly expensive, and in some instances farmers get railroaded into buying more equipment than they need to run their operation. They are then saddled with servicing a debt they can ill afford. Due to the lack of depreciation on farming equipment compared to other things, buying farming equipment is generally a good idea. In the construction industry, all three types of financing are appropriate in certain situations. I have run across construction companies that have a piece of equipment worth $300,000. that generated tremendous cash flow when being operated on a job, but was sitting dormant for two years with $5,000. per month payments. In this instance, a short term rental agreement would have been a better alternative for the company. Although construction equipment maintains its value, in this situation it's an unnecessary drain most companies can ill afford. In many instances when medical professionals set up their practices, they are sold unnecessary equipment by an overly ambitious salesperson. In some situations a workable alternative is to pay more by leasing equipment than buying it. As a practice flourishes, the ability to upgrade office equipment is fairly easy. It's very important when considering a form of financing, to factor in the cash flow from a particular piece of equipment and go with financing which best fits that particular scenario.
Tomorrow I'm going to write about how to shop for financing.
Until then,
Alan