The financial crisis and economic downturn have caused corporate America to become keenly aware of risk and develop a new appreciation for cash. Many companies are conserving cash to hedge a still-uncertain economic climate. At the same time, talk among business leaders these days is all about acquiring new risk measurement tools, improving risk management capabilities and implementing risk reduction strategies.

In this environment, it’s worth taking a close look at equipment leasing, which offers compelling cash management and risk benefits over ownership—advantages that are too often overlooked. Many risks of ownership can seem far down the road at purchase. However, before committing to a large purchase, executives should carefully consider the consequences, as well as the alternatives.
For some types of equipment, particularly information technology (IT) and office imaging machines, the benefits of leasing are well known. Most machines of this type become obsolete in short order; that’s why companies often time their leases to upgrade them on a regular basis.

Less understood are the benefits of leasing other types of equipment in industries such as construction, transportation, food processing and general manufacturing. These industries have deeply ingrained cultures of ownership, but leases allow them to hedge a variety of risks.
Many of the benefits of leasing apply to small and mid-sized businesses as well as Fortune 500 companies, regardless of the type of equipment being considered. Although each company’s situation is unique, here are some of the most important reasons for leasing versus buying.

Improving cash management and flexibility

First, leasing can help businesses improve their cash management and create flexibility. Leasing frees up capital that would otherwise be tied up in a purchase while making payments predictable and affordable. By working with lenders that are accustomed to dealing with equipment leasing, managers can obtain leases that are structured to maximize the cash benefits of intricate tax and accounting rules; this creates financial flexibility. Consider a few examples:

Mitigating asset risks

In addition to cash management issues, leasing mitigates many types of asset risk. The advantages of leasing 20 out-of-the-box computers or a powerful new document management system are clear. After a three-year lease, the company can simply turn in those machines and upgrade the entire office—often without much change in monthly payments, given the steadily declining costs for these types of machines.

A second asset risk connected to ownership is the cost of maintenance. Whether it’s a piece of food processing equipment, a plastic injection molding machine or a barge plying the Mississippi River, it will be prone to problems as it ages no matter the cost and size. For example, business owners should take into account the time-consuming process of patching old data servers. This can be costly not only in terms of repairs but also in terms of business interruption. Leasing ensures that your equipment stays new, meaning you can reduce the amount of time and money spent on maintenance.

In addition to properly maintaining equipment, businesses that purchase equipment outright are responsible for ensuring that it complies with appropriate regulations. That means, for instance, that their transportation assets must meet current emission standards. Continuously retrofitting vehicles to keep pace with new regulations can be extremely costly in terms of parts and labor, not to mention the threats to a company’s reputation in the event of an accidental breach.

Another responsibility associated with ownership is determining what to do with the used equipment. In most cases, you can’t just put it in the trash and few companies have the resources to accurately price, market and resell it. Electronics, including PCs and office imaging products, must also be properly wiped of all proprietary data before a business can dispose of them.

Managing utilization risk

Along with asset risk, companies that own equipment must also consider utilization risk. Businesses downsize, expand and move offices constantly so their equipment needs are always changing. One way to manage this is to match the term of the equipment lease to the term of the office lease.
In the construction industry, it’s common for contractors to take on projects requiring expensive and highly specialized equipment but the cost of a month-to-month rental can be prohibitive. On the other hand, buying a new piece for a project that’s expected to last only two years seems inefficient if it won’t be needed after that initial period. Leasing allows a builder to match the use of specific equipment with a project’s end date ― and then bundle that cost into its bid.

Finally, leasing is a way to diversify financial relationships. By expanding from local or regional banks to financing companies and specialty lenders, businesses gain more than alternative sources of funding. They gain a trusted financial advisor and valuable ally who can suggest additional leasing scenarios that may offer improved capitalization strategies over the long term.

Steve Battreall is the Commercial Leader for GE Capital, Corporate Finance, one of the largest providers of asset-based, cash flow and structured loans and leases to mid-size and large companies.