Purchasing equipment for business from your own investment seems very costly. New equipment often leads to more burden on your budget. But, with an equipment leasing strategy, you can get access to premium quality equipment, and you won’t have to shatter your financial budget. This blog has thoroughly discussed how to lease equipment for business and what equipment leasing and finance exactly are.
Equipment Leasing in Detail
Equipment leasing for business is a financial arrangement in which a business rents equipment from a leasing company. This type of process helps avoid purchasing the entire equipment out and out. It is quite like renting a car for an extended period. One can utilize the equipment for business operations without actually purchasing it.
It can be advantageous for businesses that require costly machinery but lack funds to buy them. Generally, businesses can buy the equipment, return it, or renew the lease when the lease term terminates.
With equipment leasing, a business can use the equipment for a specified period. This is generally in exchange for per-month payments.
How Does an Equipment Lease Work?
You may want to lease equipment for your business rather than purchase it altogether. Thus, you will enter into a lease agreement with the equipment owner or seller. Like a rental lease agreement, the equipment owner creates an agreement stating how long you will lease the equipment and how much you will pay each month.
You can use the equipment during the lease term until the term ends. You can exit the lease in some situations, and they should be included in the contract. But in many situations, the lease cannot be canceled.
As the lease period ends, you might purchase the equipment at the current market price or cheaper. But that will depend on the seller.
Different Types of Equipment Leasing
As a business owner, you can select from the various types of equipment leasing as per your requirements. Here is a breakdown of the types of equipment leases:
Finance Leases
Finance leases or capital leases are treated just like a loan. In this, there is transmission of specific rights and risks of loss of machinery to the leaseholder. The leaseholder can buy the machinery at a rate lower than the market value when the lease term expires.
Put or Purchase upon Termination Option Lease
P.U.T. lets the leaseholder know from the beginning how much it will cost to acquire the machinery as the lease period ends. Typically, the cost is provided as a percentage. With this, both the company offering the lease and the business utilizing it are aware of what to anticipate after the term is over.
Operating Leases
Operating Leases let a business use another company’s equipment for fixed per-month payments over a certain period. The lessor retains the equipment ownership during and after the end of the lease term. The leaseholder can treat the lease payments as operational costs that are tax-deductible.
Equipment Finance Agreement
An Equipment Finance Agreement or EFA is quite like a capital lease. However, it is treated as a loan for accounting. The leaseholder acquires the machinery and pays monthly payments to the lessor.
Sale/Leaseback
In this lease equipment process, you can utilize the equipment to generate funds to fulfill all the business requirements. The overall per-month payment in a sale/leaseback arrangement is completely tax-deductible. Moreover, this lease arrangement does not need any extra collateral apart from the equipment.
Equipment Leasing Process
Before the commencement of the equipment leasing and finance process, you should make a list of certain questions. With this, you can make well-versed business equipment leasing decisions. The list of questions may include:
For How Long Will you Use the Equipment?
Leasing is always the most cost-effective option when you need equipment for a short period. If you wish to use the equipment for three years or more, a loan or conventional line of credit may be more advantageous. Consider your organization’s growth: Leasing may be a better alternative than purchasing if your firm is quickly expanding and growing.
What is the Per-Month Budget?
Leasing provides a lot cheaper per-month payments than purchasing. But, for that, you must include these expenses in your per-month cash flow. Begin with what you can afford and work your way up; do not try to fit price quotations into your budget.
When Will This Piece of Equipment Become Outdated?
In some industries, technology is likely to go out of date in a blink of an eye. Think about outmodedness while considering whether to buy or lease.
Many types of equipment, like farm equipment, construction equipment, or communication technology, can be bought on lease. The specific rules and costs of a lease will be based on the company offering the lease. It will also depend on the contract’s limit. Here is all you can expect with the leasing process:
- Down payment
- Collateral
- Contract period
- End of Lease
- Lease payments
Must Read: How to get SBA Financing?
Who is the Ideal Candidate for Leasing?
There are lots of factors that decide whether a business is eligible for leasing or not. The leasing company will generally analyze a business’s credit score, seeking a strong track record of financial responsibility.
A detailed business plan shows anticipation and practicality. Evidence of consistent income assures repayment abilities, while forecasts of finances provide deep insight into future performance.
In addition, adhering to industry regulations and licensing rules emphasizes professionalism and lessens risk for the lender. By meeting these requirements, there is an increased chance of obtaining attractive lease terms and accessing the necessary equipment for the business to thrive.
Pros and Cons of Equipment Leasing
Be it any business, new or an established one, equipment is a major requirement. You may be confused about whether to buy or lease equipment for your business. If so, take a glance at the following advantages and disadvantages of equipment leasing:
Pros
- Fixed Rate of Interest: Interest rates are often similar and are integrated automatically into the per-month payment.
- No Need for Any Down Payment: There is no need to pay any down payment or collateral as a security to get business equipment on lease.
- Negligible Per Month Payments: Leasing equipment may seem more costly in the long run. But, you do not have to pay hefty per-month payments.
- Upgraded Equipment: With short-term leases, you can trade out equipment for an upgraded version.
Cons
- Costly in the Long Run: The per-month payments on equipment you got on lease are not so pricey. However, the overall cost will always be far higher than expected.
- The Equipment Will Not Be Your Asset: As the lease term expires, you will either return the equipment or begin with a new lease to carry on the use.
- There Are Stringent Terms And Conditions: If you attempt to escape the lease before the ending date, you may face legal consequences.
Conclusion
As you finally understand the leasing process and what type of plan to choose, you may begin searching for the right lenders. Regardless of your industry, equipment leasing gives you extensive financing opportunities for small businesses.
You must decide on an equipment leasing company that understands your industry and the type of equipment you seek. Ensure that the leasing terms and fees of the equipment leasing company are transparent. This will let you know what exactly you are paying for during and after the contract.
For any guidance on equipment leasing and finance, Alnicor Consulting is the ideal place to contact. The financial experts at Alnicor Consulting are highly experienced, which is necessary to assess the best for business. We also have a partnership with Diamond Capital Financing to provide full-fledged financing opportunities for businesses from various industries. Call 183-325-6267 now to learn more.