Leasing: How can it help your cash flow?

A2_BSmall businesses (SMEs) often have cash flow difficulties. Leasing an asset as opposed to paying cash for it is one option to improve cash flow – a movable asset can be financed for several years.

The benefits of strong cash flow

We often speak about them but what are they?

  • A strong cash flow takes the pressure off you as business owner – no longer is every decision solely cash flow focused
  • It becomes easier for you to resist customer pressure. For example, you can more easily resist demands for greater discount or extra days for debtors to pay debt. As margins improve, so the organisation is placed on a sounder footing
  • Your business can concentrate on longer term improvements such as branding and growing market share

Types of leasing – how to choose

There are several leasing models out there but in essence, they boil down to two types:

  1. Operating leases
  2. Financial leases

There are substantial differences between the two and it is worth taking advice from your accountant, particularly as he/she will ultimately decide how to treat the lease in your financial statements.

The major differences can be summarised in this table:

A2_tabel blog

 

 

 

 

 

 

 

 

 

 

 

 

There are some important issues here such as ownership of the asset (is it important to the business?), getting access to credit and the administrative impact on your organisation, cost (interest rate but be careful of the amount of other charges the financial institution may levy, such as administration costs) and the way your financials will look to the bank and any potential investors.

Both types offer cash flow benefits but differences such as tax treatment do give operating leases a cash flow edge. Ultimately it will depend on what kind of lease best suits your business.

Leasing and your customers

It is also possible to look at this process from the opposite angle – a business may, for example, produce a costly asset. In this case, your business may lose sales as smaller customers cannot afford the purchase price. They may, however, be able to pay a monthly lease, in which case a financial institution will be able to structure a lease to these smaller customers.  Consider recommending this when making sales to smaller customers.

Leasing is a useful tool which can be used to enhance a business.

© DotNews, 2005-2015. This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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