Financial

To buy or to lease? That is the question facing most small business owners about the equipment needed for their operation. The decision may not be as simple as it seems, since each option has its own set of advantages.

To decide whether buying or leasing is best for you, consider the following points and then consult your accountant and financial adviser.

The advantages of buying.

Owning may be less expensive over time. The main argument for purchasing equipment is straightforward: When you buy equipment, you pay for it once and can use it as long as you want.

You may find that buying could be cheaper in the long run, especially if the type of equipment you need won't be outdated soon by new technology.

Loan terms for buying may be cheaper than the cost of a lease. Even if you don't have the cash to pay for your equipment all at once, buying may still be less expensive than leasing. In many cases, the effective interest rate for a loan is lower than that of a lease.

Loans for business equipment purchases are available from banks, finance companies and through federal, state and local agencies.

The Small Business Administration is one of the most popular sources of direct loans and loan guarantees through private lenders. You'll also want to contact your city or county economic development agency to find out about local and state loan programs.

Buying allows you to claim depreciation for tax purposes. If you lease equipment, you cannot claim depreciation; however, you may be able to deduct lease payments from your taxes.

The advantages of leasing.

While buying equipment offers several compelling benefits, leasing has a range of advantages, as well. These include:

?Leasing conserves capital. Since a lease does not require a down payment, it is equivalent to 100 percent financing. That means you will have more money available to invest in profit-generating activities.

You may also find that taxes, delivery and costs not typically financed by a bank in an equipment purchase are included in the cost of many leases.

?Leasing improves cash flow. By eliminating the down payment and creating possible pre-tax write-offs, lease payments can increase your cash flow and provide tax benefits.

Also, lease terms are usually of a longer duration than purchase financing terms. That means your monthly payments may be lower, keeping expenditures at a manageable level.

?Leasing minimizes obsolescence. At the expiration of a lease, you can replace worn or obsolete equipment. Because much of today's modern equipment is based upon technology that is rapidly changing, you can see why there is some risk with ownership.

?Leasing fights inflation. Because leasing costs remain the same over the life of the lease, no matter how much prices and interest rates rise, you don't have to worry about increasing costs. That way you can acquire the equipment you need at today's prices.

?Leasing offers flexibility. As your business grows and you need additional equipment, you can add or upgrade at any point during the lease term through add-on or master leases.

When you negotiate an equipment lease, you'll want to make sure that option is available if you anticipate growth.

Weighing your options and making the right decision.

The decision to buy or lease equipment is a choice that will affect your business for years, so it pays to investigate your options thoroughly.

One way to help you make your decision is to use one of the "lease-vs.-buy" analysis software packages now on the market.

Such packages, available at computer and software retailers or on the Internet, compare the total cost of leasing vs. buying by taking into account monthly payments, interest rates, balloon payments, buy-out payments, up-front costs, down payments and other variables.

(Richard A. Hale, CFP, is a financial advisor with American Express Financial Advisors Inc.)

INSET CAPTION:

One way to help you make your decision is to use one of the 'lease-vs.-buy' analysis software packages now on

the market.