Equipment Leasing 101

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“Opportunities don’t happen. You create them.”

– Chris Grosser

Is your business short on cash, but in need of new equipment? Consider leasing. Leasing equipment may be a better alternative to buying, depending on your situation and the particular needs of your business.

Today, leasing is common practice in the business world. Equipment finance has increased tremendously since the 2008-09 recession, and only began to decrease in 2016 due to a variety of factors including the drop in oil prices, as well as an overall contraction in the US economy, according to the Equipment Leasing and Finance Association. 2017’s overall capital spending is expected to be better, though, due in part to solid employment numbers and a generally higher level of business confidence.

Comparing Leasing to Buying

When you purchase a vehicle or a piece of equipment, you pay for either using cash or by financing the balance. After finishing the payments for the item, you own it outright.

Equipment leasing, on the other hand, is essentially a long-term rental agreement. The lender, or rather lessor, buys and owns the equipment and then rents it to a business individual (the lessee) at a flat monthly rate for a set number of months. At the end of the lease period, the lessee has several options, which will have been agreed upon at the outset. It can either purchase the equipment for its fair market value or some other predetermined amount (this is known as a Capital Lease), continue leasing via a new agreement, or return it and lease new equipment, in what is known as an Operating Lease.
With a lease, you actually only pay for the use of the equipment. At the end of the lease period, you could end up owning nothing. So why lease? The answer is simple: By leasing equipment, you leave funds in the bank that can be used for other purposes. Since lease payments are usually smaller than regular loan payments, you retain more capital to support the business in other ways.

However, keep in mind that a lease is not cancelable like a bank loan or other debt. If you need to get out of a standard loan agreement, you can sell the equipment and pay off the loan, or even refinance the loan for more favorable terms. With a lease, you generally have no option but to pay off the lease in full.
So what kinds of equipment make the most sense for a small business to lease? According to research by the SBA, the most common items leased are office equipment, computers, and trucks and vehicles.

Benefits of Leasing

Leasing equipment offers a wide range of benefits, from consistency with expenses to increased cash flow. But perhaps the most significant advantage of leasing is the ability to maintain up-to-date equipment. An Operating Lease allows your business to easily and affordably add equipment or upgrade to completely new piece machinery to meet changing needs. This allows you as a business owner to transfer the risk of being caught with obsolete equipment to the leasing company.

Leasing is essentially an alternative to traditional financing and can be great for companies that are perhaps not able to obtain business loans. Here are some other advantages of leasing:

• 100-percent financing – In many cases, leasing requires no down payment. This allows you to ‘finance’ an entire purchase, including software, hardware, consulting, maintenance, freight, installation, and training costs.
• Ease and convenience – Applying for a lease is easy, and lease arrangements can be structured to meet your individual requirements. Equipment leases can range from $2,000 to as much as $2 million. For smaller amounts, you can complete a brief application and receive a final decision within days—often with no financial reports or tax returns needed. Lease agreements for more than $100,000 generally require detailed financial information from the business, and the leasing company conducts a more thorough credit analysis than it would for a smaller deal.
• Fixed, predictable payments – Having fixed lease payments enables you to accurately predict the impact of equipment expenses on your business cash flow.
• Conserves working capital – Leasing conserves available capital by requiring only a minimal initial outlay of cash.
• Tax advantages – Operating leases are generally treated as a 100-percent, tax-deductible business expense paid from pre-tax revenues instead of after-tax profits.
• Protection against inflation – Lease payments are based on the dollar’s current value. And unlike bank lines of credit with fluctuating rates, your payments are fixed regardless of what happens to the market tomorrow, making it easier to budget, forecast and grow your business.

If you’d like to discuss leasing opportunities in more depth, please contact us on (888) 748-7731 or info@commanderfunding.com.

 

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