Paying for Big-Ticket Items- the Leasing vs. Buying Decision

Running a competitive, profitable shop today means having a lot of capabilities under one roof. And that means you have to invest in a lot of different kinds of major equipment: PC-based engine analyzers and wheel aligners; lifts; transmission and fuel service units; air-conditioning service stations; tire changers; wheel balancers. It can add up to a few thousand dollars, or hundreds of thousands of dollars, depending on your particular situation.

The question is not do you need it, but how are you going to pay for it? Laying down a few thousand in cash for a single fuel-system service unit or a lift might not be a problem for your cash flow. A PC-based engine analyzer or wheel aligner is another matter; as is making an investment in multiple pieces of equipment at the same time.

In theory, you have three choices: Pay cash; finance your purchase; or lease. Joe Ghiz, a now-deceased former premier of PEI, once told University of Prince Edward Island students protesting a lack of provincial government funding for tuitions: “I’d like to give you more money. But I don’t have a money tree growing in my back yard.” And you’re probably in the same boat.

Unless you have an enormous cash reserve, putting out $50,000 or $100,000 in one cash lump sum probably isn’t feasible-that could be your whole equipment budget for a year or more. Can you get a bank loan to finance your equipment needs? Maybe. Can you make equal monthly or quarterly payments of $14,000 (or whatever the amount may be) to pay off the purchase? An outright purchase could be a real strain on your cash flow and resources.

So that leaves leasing: Pay off the equipment investment in reasonable monthly payments over a specified period, usually 3 or 5 years. In a lease, there may be residual value that reduces your monthly obligation.

Buying your equipment can tie up large amounts of working capital that could be put to other uses in your business; leasing frees up that capital for other investment in your shop.

What’s Involved

There’s a lot involved in the lease-versus-buy decision-making process. Do some research first-with the Internet, this is easy. You can find a wealth of helpful information and advice, for example, by using a search engine such as Google (google.ca) and typing in the keywords leasing+vs.+buying+equipment.

A good start is completing a leasing versus purchasing worksheet-you can find these on the Internet in a portable document format (PDF) that you can fill in by hand, or as an Excel spreadsheet that you can fill out on your computer. A series of questions will let you do number crunching in the areas of Cost, Cash Availability, Tax Benefits and Obsolescence. Some typical questions on these worksheets include: What’s the required down payment? Is your cash flow sufficient to handle monthly payments? Can you depreciate the item? What’s the operable life of the item?

Talk with your accountant, too. There may be tax advantages to both leasing and purchasing. For instance, you’ll have to pay PST and GST whether you purchase or lease.

But you’ll have to look at your cash flow and whether it’s easier to pay the GST and PST on a monthly lease payment, or pay it up front-and have to borrow more to cover it-by purchasing the equipment.

Your accountant can help you understand the effect on your cash flow, your return on investment, insurance risks, PST/GST implications and income tax implications of your options. When you purchase equipment, for example, one of your tax benefits is claiming Capital Cost Allowance (CCA) depreciation. Some leases give you this benefit as well; with others monthly payments may be a business expense. Ultimately, the Canada Customs and Revenue Agency (CCRA) is the final authority on what’s a business expense and what’s a CCA deduction, so that’s why you need expert guidance from your accountant or financial advisor when deciding whether to lease or purchase. If you lease a piece of equipment for example, and try to claim monthly lease payments when you should only be claiming CCA, then you’ll have a problem with the CCRA.

When Leasing … Is Really Buying

There’s a certain amount of complexity in the leasing/purchasing scenario. One general guiding principle is this: The longer you’re planning to keep the equipment, the better it is to buy instead of lease. If you’re not planning to have the equipment for a very long time because of technological obsolesence, then leasing is probably the better option.

So in theory, you’d lease an engine analyzer because you’ll probably upgrade it in 7 to 10 years; but you’d purchase a lift because you’ll probably have it bolted to the concrete for 10 to 15 years of operational life.

Now here’s where it can get complicated. To coin a famous phrase by war-time Prime Minister Mackenzie King, you may be leasing if necessary, but not necessarily leasing the equipment you need to buy for your shop.

One of the important factors in making the buy/lease decision is understanding the different types of leases in use. The three main kinds of leases are:

Financial Lease. Effectively, you’re renting equipment for most of its life, paying monthly rental payments.

Operating Lease. You acquire the use of the equipment for a specific period of time.

Capital Lease. You own the equipment at the end of the lease through a very cheap option to purchase (sometimes this buy-out is as low as one dollar).

The Capital Lease is generally common in the industry-remember, your equipment supplier is in the business of selling equipment, not renting it. With a Capital Lease, although you make monthly lease payments, you’re effectively purchasing the equipment.

That’s because under this kind of lease, ownership transfers to you at the end of the lease period, at a low value. So this is why you need to consult with your accountant-as mentioned earlier, there are tax implications, and you don’t want to run into difficulties with CCRA that could put a major dent in your cash flow and reserves.

Although in some cases you may have the option of an Operating Lease from your supplier or an independent financial institution, they’re not all that common in the automotive equipment market. Suppliers don’t want to be saddled with and have to resell used equipment; financial institutions are in the business of financing, not selling used automotive equipment.

Choose Wisely

When you go the leasing route, you do have options when it comes to choosing a lessor. You can lease directly from your equipment supplier, or you could opt to finance the lease with a leasing company.

Generally, however, it’s more beneficial and advantageous to work directly with your supplier. Why? Because your supplier values you as a customer, wants your business over the long term and will probably offer more flexibility.

A leasing company isn’t in the automotive service business, it’s in the financing business and doesn’t necessarily understand your particular situation; and may not be flexible in terms of credit. Also, it may be hard to find a leasing company that specializes in automotive or industrial equipment.

If you need multiple pieces of equipment and decide on the leasing option, it’s a good idea to have a separate lease for each piece of equipment-there’s more paperwork involved, but it’s better than having one blanket lease that covers multiple pieces of equipment.

If you need to return a single piece of leased equipment, you can do that with individual leases (although there may be penalties involved). With a blanket lease, you’d have to return all the equipment-not a good situation for your shop’s abilities to continue on with service business as usual!

Also, it’s a good idea to make sure that your lease term ends in a low part of your business cycle. If you’re leasing air-conditioning equipment, for example, try to have your lease expire in the fall or winter, not in the middle of July and the peak of the A/C servicing season. This enables you to replace your equipment with newer models with as little disruption to your business as possible.

Make the Right Decision From the
Start

Whether you’re leasing or purchasing, make sure you’re investing in the right piece of equipment to begin with.

Once you’ve bought the equipment, you own it; if you’re leasing, you’ll probably be faced with financial penalties if you decide to exchange or upgrade the equipment and want to break the lease early.

Then you’ll have the costs involved of starting monthly payments all over again, or coming up with thousands for a new purchase.

Also-again, whether you’re leasing (under a Capital Lease) or buying-be cognizant of your ability to sell off used equipment down the road.

At some point, you’re going to have to replace equipment. So you need to have either a way of disposing of yours, or a buyer who’s in the market for used equipment at fair market value.

You could, for example, donate your used equipment to CARE Canada (care.ca).

One of the things that this organization provides to Developing Nations is used automotive equipment; from tire changers to engine analyzers, to wheel balancers and aligners, and brake lathes.

Should you lease or purchase your equipment? Ultimately, the decision should be based on what’s right for your particular situation, after you do your research and get professional advice. SSGM

This article was supplied by Snap-on Tools of Canada Ltd.