Ask Lorraine

Question: Our family business is about to expand. We desperately need new equipment of all kinds: computers, fax machines, copiers, printers, phone systems, etc. Our dilemma is as follows: should we use our cash flow, borrow from the bank or lease our new furniture and fixtures?

Answer: What a wonderful dilemma to have! Growing pains can be the most pleasant of problems for a small business ? but addressing them can be tricky. You don't want to over-commit yourself too soon, or at least before you have some degree of confidence that your growth is here to stay. On the other hand, if you don't support your growth, you'll be stifling your business.

My recommendation is to lease the new equipment that you expect to depreciate quickly ? computers, for example, often become obsolete within five years. (Many large companies often prefer to lease rather than buy because of this obsolescence factor.) You'll save money in the long run, and it can help you avoid overspending in the near term.

This strategy is widely used. The Equipment Leasing Association of America reported that 77 percent of all leased high-tech equipment is usually replaced with new computers or upgraded versions within a two-year period.

What are the differences between leasing equipment and borrowing to buy? With a loan, you'll have to lay out the cash for a small down payment (sometimes first and last payments are required up front) and then finance the balance of the purchase price. With a lease, there's no down payment, and you'll have to finance only the depreciated value of the equipment during the term of your lease.

Also, with a bank loan, you may be required to secure the amount you borrow with other assets as collateral, which is unnecessary with a lease agreement.

If you need the equipment in a hurry, you probably have another reason to go with the leasing option. Leasing agreements are typically faster to obtain than bank loans, which can take weeks to get approved.

Of course, there are a few things you should consider before leasing:

? Make sure your agreement allows you to upgrade without additional cost.

? Check out agreements that give you flexible payment schedules if your business is seasonal in nature.

? Secure an option to buy the equipment at the end of the lease at a fixed price. That way, at the time of termination, you're not left in the lurch without the equipment to run your business.

? Research different types of lease agreements. The two most common are operating and finance leases. An operating lease has a term that is usually less than the useful life of the equipment. You would secure an operating lease for equipment you wouldn't need for very long. This type also allows you to lease equipment very cheaply. A finance lease will probably cost less over the long term.

(Note: The type of lease you choose can affect your balance sheet ? if it meets certain criteria, it could be considered a liability for accounting purposes. Check with your accountant if this is a concern for your company.)

Because nothing is perfect, here are a few disadvantages to leasing:

? Obviously, you don't own the equipment, you're just borrowing it. That means that you won't have it as an asset on your balance sheet.

? If you sign a long-term lease, you might be locking yourself into equipment that you may not need if your business changes. Check into the penalties for terminating the lease.

? If you're planning to secure a bank loan to grow your business anyway, you might want to consider borrowing a little more to purchase the furniture and equipment, so that you have only one loan payment. This would eliminate bookkeeping complications and might get you a lower interest rate.

Q: I have had a home business for almost two years now and I think I'm ready to move into an office, hire a few people, and begin expansion. My husband is harping on me to write a business plan but I don't even know where to begin. Can you give me some suggestions on how to put a business plan together?

A: It sounds like your husband is giving you good advice! A strong business plan will not only get you organized, it will set a direction for your business going forward.

Generally, a business plan has seven basic parts:

? Executive summary (who you are and what you're all about).

? Business description (the company and its objectives).

? Market strategies (your product and services and distribution plans).

? Competitive analysis (description of the industry and the market in which you are competing).

? Design and development plans (what are your plans for the future and how do you plan on achieving your goals?).

? Operations plan (detailed description of operational procedures, like production levels or manufacturing strategies).

? Management team (description of management's background and roles).

? Financial components (summary of your capitalization, your balance sheet, income statement and cash flow statement; all projected at least five years into the future).

If you plan on obtaining money from the Small Business Administration, you will need to add a section to include the materials it requires. The SBA can also be helpful in setting up your business structure.

There are several great guidebooks to help you with your plan, including: "Small Business Advisor" by Entrepreneur magazine; "The SOHO Desk Reference," edited by Peter H. Engel; "The Perfect Business Plan Made Simple," by William Lasher; and "The Prentice Hall Directory of Online Business Information," by Engholm.

Associations to contact are: The Center for Entrepreneurial Management at (212) 633-0060; and the Small Business Service Bureau at (508) 756-3513. Publications you might want to subscribe to include Success, Entrepreneur Inc., The Business Owner, and the Journal of Small Business Management. For online/software support, check out Business Plan Pro, from Palo Alto Software (, 800-229-7526), or the Business Headstart package from Planet Corp. (, 800-366-5111).

Lorraine Spurge is a personal finance advisor, author and business news commentator. She can be reached at (818) 705-3740 or by e-mail at

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