What You Must Know About A Lease Vs Buy Business Finance Decision For An Equipment Lease
Business owners and financial managers in business finance are always faced with the same decision in acquiring an equipment lease, namely should we buy or lease. Technically this is referred to in the finance books as the infamous ‘ lease vs. buy ‘decision.Let’s examine some of the key points and facts you need to consider in that decision. Naturally the good news is that an equipment lease can be used to acquire almost any type of equipment or asset – that includes equipment, machinery, buildings, etc. More often than not it pays to seek a business financing advisor who is well versed in the benefits and nuances of equipment finance.Working capital and cash flow tend to be the main drivers of the lease vs. buy decision when we talk to clients. It goes without saying that most Canadian leasing companies probably have a lower cost of capital then your firm based on their borrowing capacity and the way they are funded. Therefore that lower cost of capital becomes a positive advantage in the lease vs. buy decision.In many cases the lease vs. buy decision will be very close and the actual non financial benefits of an equipment lease will drive your final decision. For example, although you might be in a position to construct a favorable buy versus leasing model you might not want to use business lines of credit to access the cash needed to acquire the asset.Also one of the key tenets of finance is that you should use long term funds to fund long term assets – that just makes common sense. Simply speaking you don’t want to purchase an asset as opposed to l easing it and find out you might not be able to make payroll on Friday because your line of credit is maxed out!As we said, some of the pure mechanical decisions around the lease vs. buy tool (there are numerous on line calculators which are references as lease vs. purchase analysis tool) can often be over ridden in your analysis by non financial considerations. For example, let’s say you clearly don’t want to keep the asset at the end of the term of its useful economic life. That’s where an equipment lease makes total sense, as it gives you the ability to return, extend, or even purchase the asset if in fact you end up deciding to purchase and keep it if your circumstances change.Business owners might want to consider talking to their accountant or a business financing advisor on larger capital asset acquisitions. Some of the inputs required in the lease versus buy model include items such as the actual interest rate the lease company is charging you, your tax rate, the projected increase in profit via use of the asset, the depreciation expense you can take on the asset and your overall cost of capital which is calculated by analyzing your debt and equity in the business. Whew!! That’s some fancy accounting and it can best be left to your accountant or advisor on larger asset financing acquisitions. However the good news is that a simple computer spreadsheet handles all this for us nicely!In summary the leasing versus buy tool in business finance can be a great asset in your financing decisions for new assets. Adopt Warren Buffets key approach, which is simply to determine if the asset financing opportunity delivers a solid return on equity for your business.Yes our tool we outlined is important, but at the end of the day use business common sense to analyze the equipment lease opportunity and blend it into your overall business financing strategy.
Small Businesses Are the Drivers of Innovation
On a traditional and maybe not so even playing field, small businesses are not capable of competing with larger, more established industrial players. They do not possess the resources to take the same kind of large-scale actions – bulk purchases, to give a simple example. This is why they are on the losing end of any competition that requires scaling, such as a price war.Amazon.com is a good example. Look at the way that they manage to undercut traditional bookstores. This is due to their ability to survive on thinner profit margins and optimise their activities, from their shipping processes to the ways that they hold stock at their warehouses, economy of scale as such.However, if we think back to the beginning, Amazon started small (more specifically, one-man-in-his-garage small), which is pretty small by anyone’s standards. How do such companies manage to grow, and how can the small businesses of today’s world hope to emulate their success? I’ve been thinking about this recently and I’ve come to some surprising conclusions.It is my assertion that being a small business enables the innovative approaches that create game-changing economic juggernauts. On the other hand, the realities of being an economic juggernaut make the same type of innovation much less likely.This is why small businesses are the true drivers of innovation. It’s impossible to compete in a traditional manner, so the only way to win is to change the game.Unlike small businesses, large companies favour orderly changes that are easily contained in an existing industrial or corporatized context. They like controlled processes, where their tight structures and access to resources put them at an advantage. Any hierarchical organisation has the same attitude.Even if there is a mass adoption of new modes of problem solving, this is usually followed by attempts at acquisition on the part of a larger organisation. Look at the history of any large technology company – after a certain point they stop developing new products and begin buying start-ups and once again fast tracking their path to new and more innovating technology, all to stay ahead of the pack.Even when a company is not the creator of a certain type of disruption, many arise to occupy the new ecosystem that it generates. There would be no search engine optimisation industry without search engines, after all. In the rise and fall of these niches, it is the least established organisations that benefit from them.Why Small Businesses Can Create DisruptionWe know why industrial disruptions benefit small businesses, but why are they the ones that are uniquely capable of creating them? There are several reasons for this.Disruptive innovation is a mass-level, non-institutional change. At its core, it threatens the status quo and is usually born out of small, non-hierarchical groupings. Structural change and disruption take place in large, traumatic upheavals, which uniquely benefit small, loosely-organised groups.In smaller organisations, where each person is more likely to wear multiple hats, specialisation is practically non-existent due to the need of being the jack of all trades. This leads to a greater flexibility and willingness to change fundamental approaches. A specialised method of solving problems is a recipe for orthodoxy and thinking that any deviation from the norm is impractical.For exactly the same reasons that larger organisations are better at solving problems at a large scale, they are worse at recognising necessary deviations from the norm. Compartmentalised, specialised processes stifle novelty and creativity, keeping them less nimble while being necessary for mass support and service.Furthermore, the ties between those who run small businesses are most often not economic, but predicated on other social ties. Small businesses, including start-ups, are often formed among friends and family, rather than among a group of specialists in a particular field. This allows them to harness the self-motivating forces of loyalty and genuine ownership of the product, giving them that extra drive to overcome any potential hurdles.There are large companies that have attempted to create these types of structures within a larger corporate environment, but their successes are the exception rather than the rule. They become unwieldy and difficult to control from the centre. Industrial hierarchy makes it possible to take less trained workers and get more uniform results from them. Anyone who’s ever had a fast food job can attest to this.Small businesses, when faced with an unusual problem (and when you’re developing the next big thing in your garage, there’s no such thing as a usual problem) tend to find unusual solutions to it. In larger organisations, each possible new solution has to be passed up the corporate ladder, being distorted and or diluted each time it’s passed up or down the chain. This delays and usually weakens any adoption of new ideas. Furthermore, the employees in large organisations often resist new methods of their own accord, preferring habitual but non-optimal solutions.Mass adoption of new methods of socialising, doing work, or making money are never the results of the types of calculation that are common in the boardroom. Because the motives are so inarticulate and arise spontaneously from wildly varying sectors of society, this process cannot be manipulated, predicted, or controlled with any degree of exactitude.These changes also lead to the emergence of changed landscapes where the services developed by the establishment may not be relevant. Take the example of the recording industry. The CD manufacturing, distribution, and promotion infrastructure were devalued when digital downloads disrupted the industry. Their reluctance to accept it is understandable.If you already have an established business model that brings in revenue, it is usually foolish to abandon it. Even expanding your core services takes a great deal of resources and vision, and the largest, most profitable companies have made themselves that way by introducing disruption within the circumstances where they do their business.This can be accomplished, but the fundamental tendencies of each type of organisation remains the same – small organisations tend to be more agile and to seek unorthodox, innovative answers, while larger ones tend toward standard solutions to standardised problems.So there you have my view on how small businesses continue to be the drivers of innovation. As every professional was once an amateur and every expert was once a beginner and every successful company was once a small start-up.