Equipment leasing is very similar to car leasing. In car leasing, the car is the collateral whereas in Equipment Leasing, the equipment is the collateral. If payments on the Equipment Lease lapse, the equipment lease goes into default. This action can cause the piece of equipment to be taken from the lesee.
Three basic rules apply in obtaining a preferable rate when leasing:
- Good Credit
- Reasonable Debt Ratio
- Solid Operating History for the Business
Equipment Leasing is an option new business owners should explore as an opportunity to “stretch” crucial start-up capital. Start-up costs can become overwhelming for many new business owners…without the added expense of equipment ownership.
Equipment Leasing is an option for the new business owner to obtain necessary equipment without utilizing vital start-up capital or lines of credit. Depending on the credit history as well as the operating history of the business, Equipment Leasing may be an alternative to equipment purchasing.
Even if the credit history is imperfect or if the business owner does not have a substantial history in business, Equipment Leasing may still be an option rather than equipment purchasing. Because Equipment Leasing utilizes less start-up capital, a new business owner should at least explore this option as it allows them to obtain the equipment they need without utilizing essential capital or lines of credit.
Additional Reasons to Lease Equipment
The utilization of Equipment Leasing is the use of an asset. Equipment that is already owned by the business owner should be compared to employees’ salaries. No business pays employees’ salaries in advance. Employees are paid as they contribute. It is no different with a contributing asset like business equipment. Equipment Leasing enables a new business owner to pay as the equipment is used.
Fixed Payments: One advantage of Equipment Leasing is that generally the terms of the lease are fixed for the longevity of the lease. These fixed payments are a distinct advantage, particularly in times of economic uncertainty when equipment-financing transactions sometimes have floating interest rates. Floating interest rates allow the funder to raise and lower those rates as dictated by the terms of the lease.
Fixed rates allow a business owner to plan in advance exactly what the lease payments will be, so there is more control of the business budget over time. Advanced knowledge of the exact business commitments is a distinct advantage for the business owner.
No Down Payment: Many traditional equipment financing choices require a sizable down payment which can be as high as 20% of the purchase price. No Down Payment is needed on an Equipment Lease. This is a distinct advantage for the business owner.
100% Equipment Financing with Low Rates: Customary methods of equipment financing usually do not include “soft cost” articles such as software, freight and installation costs. A favorable Equipment Lease contract allows these items, which, in turn, allows the business owner to finance the entire business combination. Leasing companies also offer very low rates that can be competitive with local banks if the business owner has excellent credit.
Flexibility: In many ways, Equipment Leasing provides the lessee (business owner) with greater structuring flexibility…this industry is customarily inhabited by aggressive entrepreneur “types” who find ways to frame Equipment Lease transactions to meet the needs of their customers. This allows the lessee the opportunity to make the most of individual lease structuring which meet their individual needs such as:
- Number of Payments
- Advance Payment Amount
- Amount of Payments
- Purchase Option(s)
Easier Than Bank Loans: Equipment Leasing schedules are not only flexible, but they are easier than traditional bank loans. The leasing programs and procedures are specifically designed to eliminate the “red tape” from business capital financing.
Purchase or Renewal Options: Most Equipment Lease Agreements allow business owners options to own their equipment after a period of time. These programs consist of some of the following opportunities:
- Purchase the equipment at a pre-determined amount
- Purchase at current Fair Market Value
- Renew the lease with reduced monthly payments
The structure of the lease, and sometimes the relationship between the business owner and the funder, determines which options are available and which need to be negotiated.
Conservation of Capital: Purchasing new equipment requires a sizeable outlay of capital. Because of this fact, many business owners choose to lease equipment at the beginning of their business venture to conserve their capital. By conserving this outlay of capital, these business owners have determined that the capital on hand is better spent to hire personnel, purchase inventory, etc. These business owners have determined they get “more bang for the buck” through Equipment Leasing programs, particularly since all equipment depreciates over time. All smart business owners who have important alternative uses for capital on hand always choose Equipment Leasing in the “lease vs. purchase” analysis.
Simpler Cash Flow Forecasting: In an Equipment Lease, payments are fixed. These fixed payments (dollars per month financing) allow business owners to more intelligently budget into the future months/years in business.
Work Within Budget: As long as it fits within their operating budget guidelines, subsidiaries of large corporations or department managers of small companies all have the authority to acquire the equipment they need. Many of these managers decide to acquire this necessary equipment through leasing programs because it allows them to have the use of equipment while still working within their structured operating budget limitations. By avoiding large capital expenditures, and agreeing to smaller monthly payments, these managers are able to stay within the framework of their budget rather than having to appear before the Capital Expenditure Committees for approval, where they may or may not be successful in obtaining the desired capital for the equipment.
Tax “Perk”: As businesses have done over time, a lessee can usually deduct their monthly Equipment Lease payment as an operating expense. This aspect does reduce the overall cost of the lease. Since tax code changes are made almost annually, business owners are urged to check with their accountants prior to “assuming” this to be true.
“State of the Art” Equipment: When newer and replacement equipment is budgeted on an annual basis, managers (or business owners) who need newer or replacement equipment have the opportunity to acquire the necessary equipment without having to “ask permission”, seek new capital or reduce necessary expenditures in other areas to replace broken or retired equipment. Budgetary “pre-planning” allows business to respond to the “necessities”.
Additional Lines of Credit: When equipment is purchased with borrowed funds, credit lines with a lender may be tapered. When a business acquires equipment through a leasing program, the lessee establishes an additional line of credit with its Lessor, or holder of the Equipment Lease.
Use Lessor for Other Equipment Needs: Once a business has established itself with a Lessor for Equipment Leasing, it is possible to qualify to lease many other types of equipment for the business. A wise business owner acquaints themselves with other possibilities for Equipment Leasing for the business.
Additional Advantages of Equipment Leasing: The new equipment and machinery leveraged through Leased Equipment will allow the business owner to preserve existing cash flow in the event new business opportunities present themselves. Profits created from the increased productivity of the leased equipment as well as the increased capital generated from the new business opportunities are generally greater than the lease payments…even before any tax deductions that the business may qualify for.
Equipment Types: Once a business is established in Equipment Leasing, there is a wide range of equipment options that a business owner can lease. Some categories include the leasing of the following:
- Industrial equipment
- Machine tool
- Fitness equipment
- Used equipment
- Office furniture
- Communications equipment
- Construction equipment
- Medical equipment
- Rental equipment
- Much more