Buying any piece of equipment for your business is a capital expense, and it is quite costly. Not only is it expensive, but it is also merely a matter of time till a new version of the same equipment comes out in the market, rendering the version of your equipment inferior or obsolete. Since there are so many costs that are involved in owning and maintaining business equipment, many business owners choose to lease equipment, rather than buying them outright.
Why lease rather than buy equipment?
There are plenty of reasons why many business owners choose to lease equipment, and leasing offers many benefits, which include low monthly payments that are generally spread over the course of months or sometimes years, rather than paying a lump sum amount of money at one go. Many commercial equipment lease programs also include service agreements or service add-ons, which are able to provide peace of mind for business owners, as well as reduce the need for having in-house technicians.
For those businesses that require new equipment, or need to change the existing one, leasing is an excellent option if you cannot have your money tied up in one place. With the possibility of leasing, you are able to give small monthly payments, which are usually over a multi-year period. When your lease period is finished, you have the option of either returning the equipment, or buying it for a price; these factors in appreciation, and how much you have paid for it over the life of the lease.
Even though most companies would benefit from leasing an asset or equipment, as opposed to buying it outright, there may be some businesses that may find purchasing their equipment to be more cost-effective. A company should always compare the lease option with a purchase option, and consider these factors:
- The amount which has to be financed,
- The purchase price of the equipment,
- The inflation rate,
- The tax rate,
- Annual depreciation,
- Ownership and maintenance costs,
- Equipment usage.
Benefits of Equipment Leasing
- Many leasing companies do not require any form of the down payment from the buyers.
- You will not be stuck with obsolete equipment, especially if you need upgrades quite often.
- You do not have to get a replacement or sell your existing equipment in order to get a new one.
- You can benefit from Section 179 and deduct your payments as a business expense since equipment leasing is eligible for tax credits.
Pros Of Leasing
Leasing is the best choice for the kinds of equipment or assets that need to be upgraded on a routine basis, such as computers or other electronic devices. With leasing, you have the option of obtaining the latest machinery with minimal upfront costs, and you can also have monthly payments that are reliable, and which you can budget for.
Moreover, leasing provides the business with a wide range of options to choose from for their equipment. It makes it possible for a business to afford any kind of equipment for their business, which they might not have been able to afford otherwise.
Cons Of Leasing
You have to pay interest on the lease, which adds to the overall cost of the equipment over time. In many cases, leasing may become more expensive than buying the equipment outright. Moreover, some of the lenders may enforce some mandatory terms, service packages, or a specific term length for the lease. This can become costly, especially if the duration of the lease extends beyond your requirements. In such a case, you may be stuck with a monthly payment, as well as the storage costs of the equipment, which you may not need anymore.
Deferred Payment Lease
This form of leasing is the same as the regular lease program, except the initial lease payments are deferred for 60, 90, or 120 days in order to accommodate the capital budgeting or the cash flow requirements of a business. This is also known as “cash-flow friendly” equipment leasing.
Types Of Leasing
There are generally two types of lease agreements, as mentioned below. There can be, however, a hybrid type of lease that combines the features of both these leases.
- Capita Lease
This type of lease is noncancellable, and is for the long term; a business intends to use this for the long term or plans on purchasing it at the end of the lease period. In this type, the lessee is responsible for the maintenance of the asset and is the one who pays for the insurance cost, as well as all of the taxes that are associated with the asset.
- Operating Lease
This is a short-term lease, which is cancellable before the end of the lease period. This type of lease is quite common for those businesses that want to use an asset for a short period of time, and replace it at the end of the lease period. The lessor has ownership of the asset and also bears the risk of obsolesce.
What Is Cash Flow Friendly Equipment Leasing?
In cash flow equipment leasing, as the name suggests, the cash flows of the business are kept in mind for the initial lease payments. It is designed to help business owners match their equipment expenses better to the expected revenue, which they anticipate from the equipment. These are some of the ways in which this form of deferred equipment leasing can work for your business:
- 90, 60, 120 Days Deferred Payments
In this form of lease, you can take the delivery of the equipment on an immediate basis, and the financing company will pay the vendor right away. It does not require the business to pay in advance. Most finance companies give businesses the option to choose from 60, 90, or 120 days deferred payment options. This means you can have the equipment ready for use, yet your first payment will not be due for the next 90 days or so!
- Seasonal Payments
There are options available for seasonal payments as well. Many businesses have a high demand during their peak season times, and there are other times when their demand “dries” up. A business owner should speak to a financier who can come up with a lease program suited to the seasonal demand crunch and can distribute the lease payments accordingly.
- Payments Increase Over Time
As time goes by and the equipment is set up in the business, it will start contributing to business productivity and begin generating revenues. This is the time when the business should “step up” its payments to the finance company. As time goes by, the lease payments will also increase.
Deferred Lease Payments for 90, 60, 120 Days
There are many financiers that offer lease arrangements for business owners to buy equipment and sign up for a lease agreement so that the business can pay the cost of the equipment over time. There are, however, many businesses that are in dire need of new equipment or replacements, yet they are tied for funds or have cash-flow problems. In such cases, even the leasing does not work, since the business does not have enough for the down payment either; in such a case, a unique system of payment for leasing is the deferred payment.
Most of the time, once a business buys equipment, it may take some time until the revenues generated by it start pouring in. This means that there may be a time gap, where a business is expected to make lease or rental payments to the financier but has no additional revenues to account for. Here, a deferred payment system for any business would be a blessing in disguise. Most of the time, the lease payment can be deferred for 60, 90, or 120 days. A business can choose one of these duration options, and when that period is over, it will have to start making regular lease payments again. Deferred payments are simply a form of payment in the leasing method, which is designed to help a business match its cash flows to its lease expenses efficiently.
Leasing is considered a flexible payment option. It gives a business, especially small business owners, the ability to obtain equipment even when they do not have the necessary funds available to purchase it.
When you are looking for equipment options, always consider whether buying or leasing would be better for you, as sometimes the leasing options turn out to be more expensive. This, however, depends on how much money you have at the moment.
If you have decided to go through with leasing, you should make sure you ask your dealer everything you need to know so that you understand the terms, conditions, and payment methods correctly. If you do not have the funds to make payments until the equipment starts generating revenues, you must ask your lessor whether they have deferred payment options, and for how long. It can work even if you cannot afford any down payment. Leasing can surely increase productivity due to the latest equipment being at your workplace, and that will generate higher returns as well.