Lease versus Buy Equipment

Well if needing to raise $1.2 million dollars isn’t enough of a mountain to climb in order to open a brewery, don’t forget the line of credit of about $250,000 you will need to keep your operations solvent until you break even on a monthly basis.  For our operations, we are projecting about 16-18 months before we break even.  When you really look at the reality of opening a brewery, you almost think it would be better to head down to the River Rock Casino and see if you couldn’t do better than owning a brewery.

There is one major way to mitigate the risk associated with starting a brewery:  Lease your capital equipment.  It is a novel idea that can amortize the capital cost of equipment over a longer period of time, and help ensure short term liquidity during the crucial first few years of owning a brewery.

My personality is not one that is geared towards leasing anything.  I have never leased a car, as I think it is better to own something outright with a loan, than it is to just pay for use.  In fact, throughout my career as a salesperson, I never leased a car.  So leasing the brewhouse is not something that I ever thought was going to be an option.  But I have been told by more than a few people that there are some benefits, so lets take a look at the Pro’s and Con’s of leasing:

Pro’s of Leasing Equipment:

  • Leases are tax deductible:  The whole lease payment is a straight write-off, which is easy
  • You can afford a nicer/bigger/more reliable system as the cost will be amortized over a 5 year period (in our case it would be)
  • Few upfront costs associated with lease and the details of taxes, etc are handled by someone else
  • Don’t need a down payment, as all the actual payment of the equipment is handled by the leasing company
  • Spread the cost of the equipment from upfront when you have zero revenue, to a time period when (in theory) you have good revenue in order to pay for the equipment.
  • At the end of an equipment lease, you own the items you leased.  There is no payment like with a car, you simply own the stuff you bought.

Con’s of Leasing Equipment:

  • If our business fails, we are still bound to pay for the lease until it is complete, and the equipment is owned by the bank, meaning our biggest asset is in the hands of someone else until we pay it off in full
  • With a lease, you may have additional cash during the first couple years, but it makes cash flow a little harder in years 3-5 as you have an extra charge on your cash flow
  • Once you sign a lease, you are bound to the lease
  • Over the course of a lease, you spend about 5% of the total amount owing per year in payments to someone else, which can add up quickly when you are looking at $500,000 in leasing.

I am sure there are other points for and against leasing equipment.  When I spoke with my accountant, he said something that stuck with me, and I hope to keep in the forefront of my mind when it comes to this kind of thing:  Do whatever makes your cash flow better.  Simple enough right ….. well not so fast.

Like everything in this process, and I sound like a broken record, there is a decision to make.  Sacrifice better cash flow in years 1 and 2 for worse cash flow in years 3 to 5.  Or vice versa!  It seems to be a universally known that a lack of cash sinks businesses.  Cash Is KING!  Well, under that scenario, a lease agreement seems to make logical sense.

So into my cash flow I went, and put in leasing equipment, and voila out popped the results!  Enter dramatic music here …. It didn’t work out as well as I thought it would.  In fact, it saddled operations down the line with those extra payments, when that cash (and lost money on interest) could be better allocated to other facets of the business.  Help!  I have a meeting on Monday with our accountant, and I hope to get his expert advice on what we should do.  I wonder which way he will go?  Do you have an opinion?

In my opinion, I think we will lease some of our equipment, but at this point I don’t believe leasing all of the equipment is worth it.  The $10,000 per month in lease costs help in the short term, but not the long term.  One thing is for sure …. its just another decision to make, and one that is crucial to ST and LT success of the brewery.

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