Page 203 - Finance for Non-Financial Managers

Siciliano11.qxd 2/8/2003 7:28 AM Page 184
Finance for Non-Financial Managers
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Don’t Believe It!
Don’t believe that an equipment lease conveys unique
tax benefits. It’s not true!
We often hear radio ads touting the tax advantages of leasing over
buying, for cars, for example.They tell us that we can deduct the pay-
ments on a lease, a unique advantage over buying.Well, guess what? It’s
not true.
The cost of a car, or any other asset, is tax-deductible if the asset is
used for a tax-deductible purpose, regardless of how you paid for it.
Any difference? In a lease you deduct the lease payments and in a pur-
chase you deduct the depreciation and interest. In the end, the differ-
ence to you lies in which one cost you more money after taxes—and
that will usually be the one that cost you more money before taxes.
One more variation is worth mentioning here. A company
that owns its equipment and property outright but needs to raise
money can sell its equipment to a financing source and then
lease it back from the source, without anything changing physi-
cally. The company sells ownership of the property and then
leases it for a period of years, just as if it were an original equip-
ment lease like we’ve described above. Since the equipment is
always used, the interest cost is usually higher, but the transac-
tion effectively frees up cash invested in plant and equipment,
to be used for another purpose.

Small Business Administration Will Guarantee Your Loan
A source long known to entrepreneurs and seasoned business
owners is the Small Business Administration (SBA), an agency
of the federal government that exists to support the growth of
small business in this country. One of the ways the SBA does
that is by helping small businesses get loans. In years past, the
SBA was allocated money to make loans directly and to guar-
antee loans made by commercial banks. These days, all of the
SBA’s activity in this area goes to loan guarantees, not direct
lending. Still, this is an excellent way to get long-term, inexpen-
sive access to capital for growth.
The SBA guarantees a variety of loan types, one of which is