Equipment Options with CMAES
With scarce credit and uneven economic recovery, capital equipment users need to revisit whether their prior equipment acquisition model continues to make sense for their business.
- Short term rentals. The benefits of renting equipment include a low financial commitment and immediate deduction against income for a temporary spike in equipment need. This is offset by the higher rates and no residual value at the end of the rental term.
- Operating Leases. The benefit of leasing equipment is getting the use of equipment for an acceptable rate while conserving cash. Repair and maintenance expense can vary based on the particular leasing agreement. There is no residual value for the lessee at the end of the lease term.
- Capital/Finance Leases. The benefit of finance leasing equipment is getting the use of equipment for an acceptable monthly rate with a pre-determined purchase option at the end of the lease. This allows the equipment user to carefully budget for capital acquisition over time. Repair and maintenance expense can vary based on the particular leasing agreement. Monthly lease payments are deductible and buyout payments are capitalized and then depreciated over the useful life of the asset. The liability for the lease obligation is included in the lessee’s financial statements. The lessor depreciates the assets over the life of the lease and benefits from the residual value on sale of the equipment under the purchase option.
- Purchase with lender financing. The equipment user owns the equipment and reduces their taxable income by depreciation deductions over the life of the asset. The owner can sell the equipment at any time. The residual value builds equity in the business once the debt is repaid.
- Cash Purchase. For the debt adverse or highly profitable business owner, payment for the equipment in cash depletes cash reserves on purchase, but reduces monthly charges of interest, debt and taxes on operating income used to repay debt. The equipment user owns the equipment and as such is entitled to reduce their taxable income by depreciation deductions. The owner can sell the equipment at any time. The owner builds equity in the business.
- Purchase with continuous multi asset exchanges (CMAES) doubles IRR (internal rate of return) and reduces operational expenses by 60%. For businesses that are owners of their equipment (options 3, 4 and 5 above), the sale of equipment results in taxable gain to the business at 40% tax rate. By continuously exchanging and reinvesting their equipment rather than paying taxes and borrowing to meet their capital equipment needs, business owners can boost their internal rate of return by as much as 100% annually and reduce their operational expenses by 60%.