Lease equipment

 

Small business owners often face significant financial difficulties financing new equipment. This includes everything from phones to computers, capital equipment and any other equipment you may need. Leasing rather than purchasing can be a cost-effective alternative, especially if the equipment is urgently needed but you don't have the funds.

You might even consider leasing, even if your cash reserves are limited. Leasing can help you manage your cash flow better, as you pay monthly, predictable installments instead of one lump sum payment. You can also avoid having to tie up credit lines or use the money to fund other areas of your business.

How leasing works

The equipment rights are transferred to the lessor by signing a lease. In exchange for the lease payments, the lease-holder is the owner of the equipment. Equipment can be leased in many ways. The following are the most common:

The leasing equipment you choose, and then look for financing through a lessor. After you have found the right vendor, you will then negotiate a leasing agreement with that leasing company. You will usually get support and service for the system from your vendor in this situation, as opposed to the lessor.

You can lease equipment from a manufacturer or retailer who offers leasing through its own subsidiary. Once you have agreed on a purchase price, your vendor will make a payment for the lease agreement according to your terms.

A lessor can help you obtain the equipment. You will be able to negotiate with a leasing agency about what you need and how much you can afford. In this situation, both the equipment and the lease come from the lessor. If you are going to rent your equipment and lease it from the lessor, it is a good idea to look for the equipment first before signing the lease. Technical information should not be obtained from a leasing company.

Leasing: Advantages and Drawbacks

Here are some things to keep in mind when looking into leasing.

Leasing has no ownership. This is the most obvious disadvantage. This may be an advantage for equipment such computers, which may have changing technology needs.

Total cost -- Leasing can be more expensive than purchasing, even if you don’t have to borrow money. The average rate for a 3-year lease on a $5,000 computer will be $40/month per 1,000. This would cost $7,200.

Finding funds -- Leasing agreements are often more flexible than loans. A bank might require business records for 2-3 years before granting you a loan. However, many leasing companies will evaluate your credit history over shorter terms (6 month is quite common). This can be a major advantage for a start up business.

Cash flow -- This advantage is the most important of leasing. You can eliminate one expense that could drain your cash flow and use the money for other everyday needs.

Taxes -- Lease payments can often be deducted from your business expenses. In contrast, purchasing equipment can allow you to deduct up $19,000 of its value in the year it's purchased (as part first-year expensing); everything above that amount will be depreciated over several consecutive years. A $5,000 computer system might only cost $3,400 if you include the first-year expense deduction.

Technology changes -- Technology is constantly evolving. It is possible to end up with obsolete equipment in just 2-3 years if your high-tech equipment or computer is purchased outright. Lease may give you the opportunity to try new equipment and to keep up with technology trends. However, buying is more effective if your company has a "pass down" policy (where older technology is used by certain departments).