Many years ago, the great John Paul Getty, who at one time held the title of being the richest man in the world, made the statement: “Lease what depreciates – Buy what appreciates” as a basic philosophy that should be follow prudent companies. Most of us in the leasing industry keep the statement in our arsenal as a method of convincing companies to lease their equipment.

But what does it really mean? Let’s break down the statement into its two components and discuss why it makes a lot of sense.

First of all, “Buy what you appreciate” Simply put, it means owning assets that increase in value. Prudent entrepreneurs generally live by the rule of increase that is related to continuous growth. Revenue growth, company size growth, and net worth growth.

Very few assets that produce income and contribute to the growth of a company appreciate their value. For example, production equipment that costs $100,000 today may be worth only $60,000 or $70,000 a year from now. The team can actually reduce costs by 20% and increase efficiency by 30%; however, if purchased outright, it will actually reduce the company’s net worth over time.

Assets are depreciated at a preset rate ranging from 10% to 50%, depending on the class they are in. In year 1, the depreciation amount falls under the 50% rule, which means that only half of the depreciation can be used as an expense. The net effect is a very slow depreciation for tax purposes and an erosion of the company’s net worth over time.

Secondly, “Rent what depreciates”, refers to transferring ownership of any asset whose value decreases over time to a third party, also known as a leasing company. From an accounting standpoint, leased equipment is considered off-balance sheet financing, meaning it does not appear as a liability on the balance sheet. This speeds up the tax effect of a lease as, if the lease is properly structured, the payments are considered an expense and are amortized at 100% from day 1. Off-balance sheet financing has the effect of improving financial ratios, as debt to equity, since debt is not included on the balance sheet.

The business model of most leasing companies is based on adding multiple assets to the financial statements, thus focusing on huge depreciation expenses. Leasing companies thrive by adding assets to their books, and in turn fill a great need for organizations that acquire assets.

One final note. Many companies have a strong propensity to own equipment, a kind of pride in ownership. It should be noted that if the purchase of a piece of equipment is secured by a bank loan or line of credit, they do not actually own the equipment until the final payment is made. In fact, they hold title to the equipment and show the depreciated value as an asset, but the equipment is not owned until the loan is paid in full.

Will companies acquire equipment through a loan? Absolutely. Will companies use leasing as a means of acquiring equipment? Absolutely. The purpose of this article is to take a closer look at the statement made by Mr. Getty many years ago, “Lease what depreciates – Buy what appreciates,” and to look at ways to acquire equipment from a different perspective. .