Leasing Decisions of Small Firms (2006)
Executive Summary
This study provides evidence about the small firm lease/purchase decision, using survey data collected by the National Federation of Independent Business. The study describes the characteristics of small firms that prefer to lease equipment, identifies the primary reasons these firms lease equipment, and lists reasons why other small firms typically purchase equipment. Key findings include:
- Most of the small firms in this sample prefer to purchase equipment—only 14 percent of the sample firms report that they prefer to lease equipment.
- Small firms most receptive to leasing include firms with the fewest employees (3 or less), the youngest firms (10 years in business or less), proprietorships, and firms where the business owner has an advanced or professional degree.
- Improved cash flow is the most common reason small firms choose to lease equipment. This reason is especially important in service industries.
- The ability to use the most up-to-date equipment is the second most common reason to lease. This reason was cited most frequently by very small firms (3 or less employees), and those investing in new product lines.
- The perception of lower cost is the primary reason some small firms prefer to purchase equipment, followed by the freedom to alterassets. Lower cost is especially important to firms in the retail/wholesale industries.
The results offer a profile of small firms most likely to lease equipment. In particular, firms in which the ultimate success of an investment is most uncertain—young firms, very small firms, and those entering new product lines—are more receptive to leasing. Leasing creates benefits for these firms by reducing the upfront investment in assets and by allowing the firms to use equipment with the latest features. The study also identifies two challenges facing the leasing industry in the small business sector. First, the small firms most receptive to leasing may have difficulty qualifying for standard credit terms because they are often the youngest and smallest firms. Second, many small business owners believe that leasing is more expensive than purchasing.
