New Study Debuts: Leasing Decisions of Small Firms Improving cash flow continues to be the main reason small firms choose to lease equipment, according to a new Equipment Leasing and Finance Foundation study on the leasing decisions of small companies. This study, called Leasing Decisions of Small Firms, identifies the reasons firms choose to lease and the reasons they choose to purchase. Also, it describes who, in the small business community, chooses to lease and who chooses not to. Using survey data collected by the Gallup Organization on behalf of the National Federation of Independent Business, the study offers a profile of small firms most likely to lease equipment and also identifies challenges facing the leasing industry in the small business sector. “There is a huge opportunity for lessors in the small business area,” says Morris G. Danielson, Ph.D., St. Joseph's University, a researcher on the study. “Only 14 percent of the firms in our research lease in any meaningful way. That means 86 percent are potential customers.” One of the most striking outcomes of the study was that the more educated a business owner, the more likely they chose to lease. But, Danielson says, “The highly educated owners also don't lease 100% of the time. The ones that do not lease as much don't because they perceive it costs more. They don't buy into sales efforts that don't hold up to cost tests. But, educated owners will seek to understand the cash flow and tax benefits.” The study found that the small firms most likely to lease are the very smallest companies with one to three employees. Also, the firms that are the youngest (in business less than 5 years) are good leasing candidates. “They are growing and do not have as much capital built up,” says Morrison. “But, these firms pose both an opportunity and a challenge. Some of these smaller firms may be less likely to meet standard credit terms.” Educating potential lessees on the benefits of leasing was offered as a main strategy for lessors seeking to increase their share of this market, especially pointing out tax benefits and risk transference benefits. Morrison says, “a main reason the respondents reported they purchase is that it costs less. So, there really is a perception that leasing is more expensive. The industry hasn't convinced small businesses the benefits outweigh the costs.” He adds that specifically where lessors should educate this market is on tax benefits. “The study asked if they calculated tax consequences and asked about their use of cash flow projections in investments. What we found are the firms that calculate the tax implications of investments are more likely to lease equipment,” he points out. The study also found that firms have a preference for leasing or purchasing depending on the kind of investment they were making. “Firms that are investing in new lines and making riskier investments are the firms that would be most likely to lease,” Morrison says, adding that the firms choose leasing for risk transference reasons. “We found that the small firms are buying into the risk transfer benefit,” he says, citing the very smallest firm, the youngest companies and those organizations investing in new business ventures as the prime candidates for this benefit. So lessors seeking an untapped market should consider the small business community. Just make sure you educate them well, advises Morrison. In other words, help them do the math. The Leasing Decisions of Small Firms study was conducted by Danielson and Jonathan A. Scott, Ph.D., Temple University and is available through the Equipment Leasing & Finance Foundation at www.LeaseFoundation.org. The cost to non-donors is $75.00 for the study; donors receive a copy at no cost. Sites of Reference: http://www.leasefoundation.org/store/ CONTACT: Lisa A. Levine, CAE Equipment Leasing & Finance Foundation
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