Commercial equipment leasing is becoming the best financial option for businesses of all sizes.
According to the Equipment Leasing and Finance Association (ELFA), approximately 80% of U.S. companies lease some or all of their equipment, and there are thousands of equipment-leasing firms nationwide catering to that demand.
So why lease instead of buy your equipment? With a lease, you pay a certain monthly fee for the rights to use the equipment. At the end of the lease, you can return the equipment or choose to buy it outright for a pre-determined amount. Leasing is a great way for businesses to start, grow or expand to get the equipment they need for their businesses, whether it is a dishwasher for a restaurant, dump truck for a construction firm, machine tool or a point-of-sale system for a new retail outlet. We'll get more into why leasing is so popular below, but first you should know about your options when your lease ends.
There are three standard end-of-term options:
If you have recently paid cash for some new equipment or own equipment free and clear, there are some equipment leasing companies that can offer you cash for the equipment and convert your purchase into a lease. This is called a sales lease back. Certain credit guidelines must be met and certain documentation such as invoices and proof of payment must be provided.
OK, so what are the advantages of leasing?
So why do people lease?
Companies lease equipment because leasing represents the best use of their financial resources. When capital is conserved by leasing equipment, it can be used for other company uses (increasing inventories, expanding sales, etc.). The average return on capital in business is 18% AFTER taxes. Businesses that do not lease operate at a competitive disadvantage. They deny themselves the productivity-enhancing effect of better equipment that they could otherwise obtain. They operate with older equipment than they could otherwise afford. Ultimately, they may lose the ability to compete, having higher costs and lower payments than better-run operations.
Leasing also has its disadvantages. For example, the lifetime cost of the asset is generally going to be higher than if you purchased it. You are also giving up ownership interest, which can be especially costly if you rely on the equipment and find at the end of the lease that the equipment is too expensive to purchase outright, you might also find that you lose the tax benefits of depreciation deductions.
Equipment Leasing Average Costs and Terms:
Equipment leasing rates are determined based upon the size of the lease, your personal and business credit score, payment history and time in business.
Equipment priced less than $100,000 usually comes with a higher finance rate - anywhere from 6% to 20% and larger, more expensive equipment can generally be leased with a financing rate of 6% to 8%. A+ credit with more than 2 years in business can be as low as 4.5% with full financials.
Terms are usually 12 months to 60 months but can sometimes be longer depending on the type of equipment and the amount.
Ask the following questions about each leasing source you investigate:
1. Who are you dealing with? Is there a separate company financing the lease?
2. How long has the company been in business?
3. Do you understand the terms and conditions during and at the end of the lease?
4. Is casualty insurance (required to cover damage to the equipment) included?
5. Who pays the personal property tax?
6. What are the options regarding upgrading and trading in equipment before the lease period expires?
7. Who is responsible for repairs?
You might consider working with an equipment leasing broker. They facilitate leasing contracts between a lender and a person or company. They work with financing companies, banks, manufacturers and retailers to secure the best deal for his or her client based on need, credit, and ability to pay. In other words, the broker is an intermediary between the user and the lender.
Every lease decision is unique, so it's important to study the lease agreement carefully. Consider asking a lawyer to look over it before signing.
Cheryl O'Neill Gowen is president and CEO of Alternative Funding Options. She works with business owners seeking cash flow from non-traditional sources, drawing on more than 30 years' experience in banking, financing and staffing. Contact her at: [email protected].