In order to operate a successful business, shop owners need to strike a balance between spending money on necessary tools and equipment while maintaining enough cash to cover other business expenses.
According to Stephen Sheinbaum, founder of Bizfi, leasing is an option many independent automotive shops can consider to stretch their dollars further.
Bizfi is an online marketplace designed to give multiple financing options to applicants.
“We provide financing to small and medium-size businesses. We’ve been doing it for 10 years, and I think we’ve given, approximately now, $1.3 billion or $1.4 billion to about 25,000 business owners in a variety of industries,” Sheinbaum says. “Actually, auto parts and repair is probably our second largest industry code.”
Automotive shops may consider leasing expensive tools, large pieces of equipment, company vehicles or other items around the shop, like lighting and signage.
“The bigger issue is for the owner of the business to decide if he wants to buy or if he wants to lease because there are real pros and cons to each,” Sheinbaum says.
One of the key benefits to leasing is “there is no substantial outlay of cash,” Sheinbaum explains.
“Most business owners don’t necessarily have all the capital they need, and buying a large piece of equipment – a large capital expenditure – many times, uses much of what free cash a business owner has. So leasing, undoubtedly, affords that,” he says.
Because the length of terms fluctuates, shop owners can use a lease to upgrade tools and equipment as technology evolves. Additionally, leasing can allow for lower payments.
“There are some tremendous tax advantages to leasing,” Sheinbaum adds. “Many times, your lease is fully deductible. Whereas when you own something, your payment is broken down into both principle and interest and you only get to deduct, generally speaking, the interest portion.”
However, over the long run, Sheinbaum says owning can be cheaper. “And you can, potentially, get really long warranties with it,” he says. “And sometimes buying something can actually be easier than negotiating a very long lease.
“There are definitely pros and cons to each.”
Leasing can be expensive if the same piece of equipment is leased repeatedly. Plus, no equity is built up over that time. An owner also may have an easier time selling a business if equipment is included in the sale.
Sheinbaum notes that the paperwork of a lease can be complicated at times. He suggests getting professional help, especially if it’s a large expenditure.
“Leasing a significant piece of equipment is a pretty complicated endeavor,” Sheinbaum says. “For most people, if something is over $50,000 or $100,000, they should definitely seek the advice of their lawyers, accountants or tax professionals to help them navigate the process.”
A drawback to purchasing tools and equipment, in addition to using up a lot of a shop’s free cash flow, is the risk that money can be tied up in outdated models or antiquated technology.
If an owner decides to lease, he or she can negotiate the cost of the capital, the terms of the deal, the amount of money put down, and an option to negotiate to buy the equipment at the end of the lease.
“The biggest issue that people need to focus on is what happens at the end of the lease, and what rights and responsibilities or options people have to purchase the equipment at the end of it and for how much,” Sheinbaum says. “That’s the most critical part of a lease – at least in my view.”
When ready to lease, Sheinbaum explains that many times the person selling equipment will be able to put a customer in touch with people who provide lease financing. “You can also, very often, go to the same people that finance the purchases and they will finance the lease,” he adds.
