Financing vs. Purchasing: Weighing the Benefits of Each Instrument Purchasing Method
By Keith Martinko
Thermo Fisher Scientific
Is it possible to access current technology and still have cash to grow your laboratory business at the same time? The answer is yes, even in today’s tight credit markets. Many instrument manufacturers can help by providing creative financial solutions to allow their customers to gain access to instrumentation without severely affecting cash flow. However, financing equipment is a big decision and weighing all equipment acquisition options is critical.
When it comes to putting down a large sum of cash or going to a lending source to upgrade technology, an equipment financing option can be a better alternative for growing businesses. Having your cash reserves invested in equipment makes you asset rich and cash poor. Cash poor companies often find it difficult to respond to changing market conditions or take advantage of new opportunities. Let's take a closer look at some of the advantages of equipment financing.
| | Finance | | Purchase |
Cash flow | | Preserves cash for other investments. | | Consumes cash. |
Accounting | | Favorable impact on financial ratios such as debt-to-equity. | | Equipment booked as an asset requiring a depreciation schedule. |
Simplicity | | Financing typically requires fewer internal approvals than a capital purchase. | | Purchasing typically requires internal approvals from capital budget committee. |
Budget | | Payments are typically made from the operating budget allowing companies to acquire needed equipment when capital budgets are exhausted or frozen. | | Equipment purchases typically made from capital budgets, which require additional approvals. New equipment cannot be acquired if capital budgets are exhausted or frozen. |
Flexibility | | Financing provides more options during the term of a lease and at lease termination. Equipment can be upgraded or swapped during the term of the lease if desired. | | Upgrading equipment may be more difficult if capital budget approvals are required. There are no options to swap or return the equipment. |
Lifecycle | | Purchase equipment at end of the lease term at fair market value or extend the lease if the equipment still has a useful life. If not, the equipment can simply be returned. | | If the equipment cannot be re-deployed, companies are faced with the costs of disposal, storage or recycling. |
Technology | | Maintaining leading edge technology is simpler with financing since companies do not own the equipment directly. | | Companies must redeploy, remarket, or dispose of existing equipment before acquiring new technology. |
Obsolescence | | Companies can upgrade during the lease term and have a number of options at the end of the lease term, including simply returning the equipment. | | Companies may require new technology at shorter intervals than depreciation schedules allow. Acquiring new equipment may result in a book loss. |
Disposal | | Eliminates uncertainty of remarketing or disposal of old equipment. Equipment can simply be returned at the end of the lease. | | Companies must comply with strict EPA regulations when disposing of equipment, which can be costly and time consuming. |
Given all the potential benefits of equipment financing, it often makes sense for many business owners to save their cash reserves. However, there are some downsides to equipment leasing such as higher costs and more complex asset management. So what is the best option for you?
First of all, decide if your laboratory business needs to own the equipment or merely use it. A strong vision of your company's strategic direction and future financial needs is vital. It is important to look at your business objectively, ask questions and find the answers you need. Do we have any large projects on the horizon that may require additional staff and access to cash? Is the technology required as part of our long-term business goals or does it serve a short-term strategic opportunity? Do we have the internal resources to manage the asset throughout its life cycle? What are the tax implications of owning the equipment versus leasing? Answers to questions like these can help guide your decision-making process. In the end, review or update your business plan, talk to your accountant and discuss what financing options are available from your instrument supplier.
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