Every smart business runs on the principle of increasing profit margins. Entrepreneurs are always looking to scale their businesses through extraordinary means. But not everyone is a Zuckerberg or a Bezos. Some businesses are simply not universally scalable. Either the market is small, or fulfillment is slow due to the nature of the business. But does that mean that such businesses should have low-profit margins? Absolutely not.
You do not need to be an innovative genius to scale your business with respect to profit margins. In fact, your products and services do not need to sell at exorbitant rates either to achieve this. You just need to be smart with your money.
Consider how much money you spend purchasing new assets for your operations. Say you’re an IT service provider; how much are you spending on new computers and equipment each quarter? New equipment is not easy to come by as the manufacturers are also looking for a large profit margin, just as you are. But think about this: do you have to own an asset to use an asset? The truth is that, in today’s world of innovative financing, you do not need to cough up large funds to buy the proper equipment. Leasing is always an option.
What is leasing?
In a nutshell, leasing is where you pay a monthly fee to a lease provider to use an asset without ever having to own it. The lessor deals with the purchase, the maintenance, and even the taxes. Your only worry is the monthly payments which are often nominal compared to what you would have had to spend for a traditional purchase. Also, you must keep a record of every leasing activity’s financial impact on your business. You can purchase lease accounting software from a reputable company that might even provide guidance on current leasing regulations and standards.
So how exactly does leasing an asset prove to be better than owning one? In this blog, we’ll discuss three reasons how:
- Lower Cost of Purchase
When you invest in an asset for your business, you’re looking for quality. Unfortunately, many manufacturers and service providers unknowingly sell you low-quality goods if you’re not able to pay top dollar for premium equipment. But you’ll get access to those assets at a much lower and more reasonable rate through leasing. Since leasing does not make you an owner of an asset, it is better to think of it as renting something. Much like renting a residence, you pay a 2-3 month advance on the asset you’re getting (much lower than the down payment on purchase). Then you have to pay a nominal leasing fee each month until the end of the lease agreement. This way, you significantly lower your acquisition cost and get access to assets that you would not be able to otherwise.
- No Taxes
There are numerous tax benefits in leasing an asset. The government must tax you on nearly everything you own. And the higher the value of a particular asset, the higher the tax rates. But since leasing is not ownership, you get a tax break on that. So not only do you save money at the point of purchase, you save money you would have to spend in perpetuity post-purchase as well.
Let’s face it: if you’re looking to really scale your operations, you’ll need reliable funding. But one way through which small businesses damage their functionality is by attempting to scale without properly considering the implications. And when you do this, you hurt your reputation more than you can imagine.
Most businesses rely on banks and a decent line of credit to acquire the proper funding for scaling. But by purchasing assets rather than leasing them, you risk putting in more money than you can justify. And that hurts your reputation if you’re unable to get the bank the required returns. By leasing, you can judge the viability of an asset without paying too much money upfront. This allows you to experiment and have greater flexibility in your business model without hurting your credit. Because if a particular piece of equipment seems to be a bad purchase decision, you can always terminate the lease and save money.
The Bottom Line
A lease can be a catch-all solution to many problems a business may face regarding smart spending – if done right. You get lower rates, low operating costs, and even greater tax advantages. Asset leasing is a growing industry that has seen rapid expansion in many countries due to the win-win situation it creates for both parties. There is unlimited flexibility in leasing, with parties often tailoring their lease agreements to maximize benefits. This trend may not continue forever, but right now, it saves money. Asset leasing is one of the best ways to run your business at maximum capacity and low risk.