Leasing is like a rental agreement. You will pay a supplier or owner or equipment that you wish to use with an agreed amount as a fee. You can use the equipment as though it was your own. In a lease agreement, no one else can use the equipment without your approval. Your right over the equipment is as though it is your own.
Moreover, the owner and lease provider of the equipment cannot repossess the equipment until the agreement ends. However, there may be clauses that either party can cut short the duration of the lease agreement. Often, there are penalties and charges that parties agree if the period will be cut short.
The person leasing the equipment will pay a monthly rental fee. Sometimes, the equipment provider would agree for a quarter or yearly rental fee. In equipment leasing, there is no capital purchase nor balloon payment that is applicable to take ownership of the equipment after the agreement.
The lease agreement will always give the company some buffer to negotiate a better deal and even specifications of the asset.
The firm that leases their equipment does not invest a large amount of capital because of the depreciation of the asset. Usually, they don’t take the material too long but instead, find a buyer to convert the asset to profit.
Types of equipment leasing
There are two types of equipment financing:
1. Operating Leases
The customer or lessee will rent the asset for a fraction of the item’s useful life. Usually, these are short rental periods. The agreement can also include maintenance provision. In this type of equipment leasing, the lessee has the flexibility to negotiate and decide.
Since the lease agreement is usually short term, it is always possible to do regular upgrade. The good thing about operating leases is that there some tax benefits.
2. Finance leases
The lessee will rent the equipment for the asset’s useful life. The lessee will take whole risks and ownership which includes maintenance cost and depreciation value while using the asset. However, the lessee will not own the asset after the contract.
So how does it work?
Equipment Financing / lease will state the initial rental period. The monthly payments will add up the full cost of the asset plus interest. Once the contract period ends, the asset is expected to be its maximum lifespan. The lessee and the provider may have the options:
- Continue to use the asset in the second phase of the lease period. The payment could be cheaper.
- Sell the asset
- Return the asset to the lessor
Benefits of equipment leasing
You can lease any equipment as long as it fits the need of your business
Equipment leasing is common to industries like gaming machines in local pub house. Companies go for equipment leasing to office fixtures and furniture, printing equipment, large coffee machine, and commercial vehicles. Even an expensive type of equipment brand, you can merely access through equipment leasing.
Ready and fast access to the equipment that your business needs
Instead of waiting for adequate savings or roll-outs of your profit before you can buy the equipment you need, leasing will make your material available right at your doorsteps. You can also get a higher standard of equipment that might be difficult to purchase outright.
Better budget spending management
Leasing is useful when you want to control and spend wisely your budget. The fixed monthly payments will help you forecast your spending each month. In this way, you can also manage your cash flow effectively.
A lender of any equipment
Lenders have specializations of different leasing forms. They could be on finance leasing, lease rental, contract hire or operating leases. Each type is different. Typically, it depends on the equipment being loaned-out, the purpose of tenancy and lease agreement. A finance lease will not allow you to own the equipment at the end of the contract period and choose to return or continue leasing.
Leasing and repairs
There are equipment lease package and offers that the finance company will pay for the repairs and spare parts of the equipment. Contract hire which is often used for vehicles uses this kind of approach. The finance company goes to agree for this incentive because the lessee agreed to pay the equipment value at the end of the contract.
Easy to opt upgrade
Different equipment lease options will fit the needs of different businesses. There are businesses that it will be practical to return the equipment to the provider after the agreement. There are also others that opt to purchase at the end of the contract or upgrade to a new version.
Not a fixed asset
When you lease a piece of an asset, you don’t own a title of the asset. Therefore, the asset will not go on to your balance sheet. Positively, it can be tax efficient. However, the negative side of this is that you don’t have any fixed assets in the business. If you are planning to build a track record to access business financing, the case will not help you.