Choosing the Best Type of Lease for Your Business – Part II

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“Success in management requires learning as fast as the world is changing.”

– Warren Benning

Having looked at some of the day-to-day operational factors involved with leasing, let’s also take a moment to consider the accounting and other finance-related matters. There are two main types of lease, as we’ve learned. They have some crucial differences which a business owner must know and understand before entering into any agreement:

* Operating Lease – this is a lease agreement with the understanding that the lessor does not ever intend to own the equipment. The intention is that the equipment will be replaced when it becomes obsolete. This works well for equipment that quickly becomes outdated, such as computers. From an accounting standpoint, operating lease payments do not appear on the balance sheet and are tax-deductible. This is particularly beneficial for small businesses with limited cashflow.

* Capital Lease – under this kind of agreement, best suited to equipment that holds value well and won’t become obsolete, the lessor intends to one day own the equipment. For accounting purposes, the payments under this type of lease agreement are treated as long term debt on the balance sheet.

Beware Hidden Costs

By doing a little due diligence at the outset, you can make sure your growing business avoids hidden expenses. Staff training requirements are a key consideration that many companies overlook when negotiating a lease. Will the operator of the equipment receive the necessary training and certification from the leasing corporation? If not, how will you provide for that?

While training and certification will not be a concern for every piece of equipment leased, for those items that require certified training make sure you know if it will be available and at what cost. When leasing computer equipment, consider how software licensing will be handled. If not packaged into the hardware lease, licenses will need to be obtained separately.

Finally, having a clear understanding of the lease renewal terms will prevent an unanticipated rise in cost at renewal time. Some leasing contracts will allow the price to be locked in for a set time even beyond the lease period. So for example, a lock-in period of five years may be negotiated for a lease that only lasts two years, so that at the renewal point the cost is already fixed for a further three years for that particular piece of equipment. This kind of clear-eyed long-term budgetary forecasting can save your company money down the road.

For more information on this and other matters related to small business financing, please contact Commander Capital Funding Group today on (888) 748-7731 or info@commanderfunding.com.

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