Equipment Leasing: Defined
It’s inevitable. Every successful business has to deal with expenses related to investing in new equipment. But what happens when you don’t have the capital readily available?
While not every business is financially ready to purchase equipment outright, many turn to equipment leasing. By definition, equipment leasing is the process of obtaining equipment on a rental basis. In this type of business loan, payments are made in small, affordable installments as opposed to paying the full price all at once.
Equipment financing is a loan that helps you purchase new equipment by using the equipment itself as collateral. This type of financing, however, requires the end user to invest a down payment while the loan finances the remaining amount. A lender approves you for a loan based on the equipment value, which you'll pay back with interest over time. In short, the borrower owns the equipment, and the lender has a hold on the equipment until it is paid in totality.
An equipment loan doesn't necessarily take the piece of equipment into account so should it become obsolete, the loan isn't affected. Depending on the borrower's situation, this may not be a viable option if you do not have the cash reserves. However, if you have enough money to invest, and the piece of equipment you intend to finance will last a long time, then this might be the best way to go.
Equipment leasing, on the other hand, operates more like a rental agreement in that you lease the equipment for a monthly payment. An equipment lease will require no down payment and covers only the value of the equipment expected to be utilized during the lease term.
At the end of lease period, the lessee has the option to buy the equipment for its remaining value or walk away from it. If you choose to purchase the equipment at the end of the lease period, the title to the equipment is released to you at that time. Even in a bad economy, your lease payments will always remain the same regardless of rates and inflation. Equipment leasing might be a better alternative if you are planning to keep a piece of equipment for the short term rather than purchasing and reselling it when you no longer need it.
The Benefits of Equipment Leasing
This is a question that many business owners continually ask: “How will leasing equipment benefit my business?” If you decide to lease equipment instead of purchasing it outright, there are many benefits other than the breakdown of costs.
Here’s our top 10 benefits of equipment leasing:
- It's a simple and Straightforward Process
Step 1: Fill out an equipment lease application.
Step 2: The leasing company processes your application and notifies you within 24-48 hours.
Step 3: Once approved, review the lease terms, monthly payments and APR and sign off on them.
- Low Upfront Costs
Equipment leasing (in most cases) does not require any money down or outside collateral to be put up (because the equipment itself is the collateral). Once approved, you are accountable for the monthly payment that is stated in your terms. Failure to pay will not result in lost business assets; however, the equipment can be taken away.
What happens when the term of the lease comes to an end? Once the date of your lease expires, you will be presented with a few different options:
- You can renew the current lease. This is a great option for equipment that lasts many years without compromising efficiency.
- Jump straight into a new lease. This is a great option when a newer equipment model has been released and will increase productivity.
- Purchase the used equipment at fair market value. This is another great option for equipment that holds value.
- Obsolete Equipment
Have you ever thought about outdated equipment hindering productivity and efficiency? With the right equipment leasing company, you will always have the option to invest in the newest piece of equipment.
- Cash Flow Maintenance
A major benefit to equipment leasing is that it preserves cash flows. Many businesses work hard to manage working capital and try their best to limit spending to only when necessary. Leasing, as opposed to financing, achieves that goal because down payments are typically not required and monthly payments are deemed to be affordable for the business before being approved.
- Replacement and Upgrade Options
With equipment leasing, the burden of faulty machinery falls on the leasing company. If the machinery breaks or needs a new part, you are not held responsible for the costs associated with fixing it.
- Single Point of Contact
Many businesses have needs beyond leasing only one piece of equipment. A manufacturing company, for example, requires many different pieces of machinery that must be replaced on an annual basis. In order to avoid signing into a new lease contract with new terms and conditions each time, consider a master equipment lease.
One single point of contact makes it easy to reach out with questions about terms, repairs, or anything else that may arise regarding the equipment financed under the agreement.
- Access to Competitive Rates
The leasing company that you choose usually has preferred rates. With the right lender, you can receive the equipment at a lower rate.
- Tax Benefits
Unlike purchased equipment, leased equipment is tax deductible. Under Section 179 of IRS tax code, equipment leases count as a tax-deductible operating expense. Additionally, lease payments are treated as a business operating expense accounting-wise, so there isn't any need for a depreciation schedule.
What to Look for in an Equipment Leasing Company
Choosing the right equipment leasing company is an initiative that should be thoroughly researched. After all, it involves the future success of your business. Seek out referrals, network with friends and family, and look at company reviews before making a decision.
Which characteristics should you take into consideration? How about the company location? What about the size of the company? Are there any types of equipment that they specialize in?
Here is a deeper look into some of the qualifications that are important:
1. Location of the Lender
While the location of the lender will not interfere with the equipment itself, it may hinder your ability to reach your contact during your normal business hours. Keep in mind that if you are located on the east coast and your lender of choice is on the west coast there may be some availability gaps.
2. Flexible Payment Options
Traditionally, fixed payments were the only option. However, leasing companies are now more flexible in coming up with payment plans that best fit your budget.
For example, the skip lease will allow your company to skip payments on slow months with no penalties. There is also a step up lease that is suitable for companies with low income. Choose a lender that provides room for negotiation.
3. Company Policies
In most leases, operating and maintenance costs are included in the agreement. While the costs may be included, however, the service may suffer. What is their policy for repairing equipment or machinery in a timely manner? To avoid losses, you’ll want to make sure you are not left without machinery for a long period of time.
4. Buyout Options
Is your machinery known to last a long time? Especially in the case of heavy equipment, you want to be aware of your options once the lease ends. If you can see your company using the leased equipment for a long period of time, then it is important to find out if buyout leases are offered. If so, the leasing company will sell you the equipment at fair market value. You can structure your payments to cover the cost of the item over your term and then purchase it at the end.
The Bottom Line
According to the SBA, approximately 80% of all US companies are currently leasing equipment for use in their business. Since 1985, CMS Funding has been providing complete equipment leasing to companies that range in size from a one-person operation to those on the Fortune 500 List. We lease all types of equipment – new and used – nationwide. If this is something that your company could benefit from, we encourage you to complete our lease application.