Leasing your equipment was a great idea. You got the new equipment you needed to work efficiently and out perform competitors. Leasing freed up your cash-flow which allowed you to operate from a power position. It’s been so successful that you now have extra cash on hand, so you can pay off your lease early. But, is buying out your lease early a good idea?
As I’ve mentioned before, lease payments can be tailored to fit your monthly equipment budget but there are a few things to be aware of as you plan for the future.
Case in point, I had a call from a client last week who wanted to buy his five year lease out after the first year. You can imagine his distress when the buyout was higher than the equipment’s original price.
Here’s why. With lease financing, the interest is at the front of the term. So if you do buy the lease out early, all you will have done is pay off the interest. You haven’t started to buy down the principal at all.If you’re lucky enough to experience a financial windfall, it would make much more sense to let the lease run, take the tax deductions into your business and invest the newly found cash in a GIC.
The bottom line is, as you crunch the numbers to arrive at a monthly payment that fits your revenue stream, keep in mind you want to keep that payment for the life of the lease. There ARE advantages to upgrading equipment during the life of a lease but absolutely none when it comes to buying the lease out early.