Everything You Need to Know About Equipment Leasing
Thinking of starting a business but worried about whether you have the funds necessary to buy the equipment needed to run it? Do not worry.
Thanks to industrial equipment leasing, you will be able to procure the necessary tools needed to run your business without having to deplete your funds.
Why Lease Equipment
Leasing equipment is far less costly than buying it directly. Instead of paying the full value of the equipment, you only need to make a small monthly payment to get the right to use it. This allows you to retain the capital, which can be used for other business activities. Plus, since the monthly payments are accounted for as an expense, you will be able to gain tax deductions on the same. In fact, if the equipment lease is structured the correct way, you may be able to net up to 100% in the deduction.
Industrial equipment leasing is very useful when you want to buy something that is too expensive. Under normal circumstances, you will be forced to buy cheaper equipment, thereby compromising on the quality of your product or service. This will also harm your business revenues since customers often go for good quality products if they are priced not too differently. To avoid such a scenario, you can use the leasing option to acquire the top range equipment no matter how costly they are.
In case you are not sure that you will be using the equipment for a long time, you should use leasing to obtain the equipment. If you purchase it thinking that you will sell the same at a future date when the equipment is no longer required, you are taking a big risk. If the demand for the equipment sharply falls due to any reason, you will end up making a loss on the resale, thereby reducing the overall earnings of the business. By leasing the equipment, you only have to cancel the contract when you think you no longer need the machine.
Leasing also allows a business to keep upgrading their equipment at the lowest cost. If you buy equipment outright, you will largely be forced to keep using it even if better, more advanced equipment were to hit the market in a few months or years. However, when you lease equipment, you do not face such restrictions. You can easily switch over to the latest equipment by ending the existing lease and taking a new lease.
Assets that are brought through a lease need not be listed in the balance sheet. Plus, all financial obligations associated with such assets also need not be included as liabilities. As such, the financial indicators like debt-to-equity ratio, company earnings-to-fixed asset ratio, and so on will improve. This will help your company look financially strong in the balance sheet, allowing you to raise funding for other business needs.
Choosing an Equipment Leasing Company
Before you choose a leasing company, you need to be clear on what type of lease you want. Basically, there are two types of leases – capital lease and operating lease. In a capital lease, you will own the equipment after the lease term ends. In contrast, an operating lease does not give you the ownership of the equipment. At the end of the lease term, you will have to return the equipment back to the lender or will be provided with the option to buy it at a reasonable price. Operating leases are ideal if you think that the equipment you procure will not be used in your business for too long.
You should be aware of the various types of fee and charges that will have to be paid when taking a lease. The biggest cost you will have to bear will be the interest rate. Compare the various options offered by different companies before you decide on a lease. The origination fee is usually common when taking loans and is also charged by some leasing companies. This is basically a fee that is applied upfront and is deducted from the money advanced to you. The administrative fee is charged by the company for servicing your account. The fee may be charged either one time or at intervals.
A down payment is the percentage of the equipment cost that is expected to be borne by you. This is usually only seen in the case of equipment loans. Leasing companies typically do not charge down payment. However, it is better to enquire about the same to be on the safer side. Finally, there is a residual amount. This is the money that is leftover at the end of your lease. You can pay this amount to the company to buy the equipment. A lower residual amount means that you will have to pay more to own the machine.
When selecting a leasing company, keep in mind that most specialize in specific industries. For a business that requires bulldozers, cement mixers, cranes, and such machines, you should approach industrial equipment leasing companies. You should only approach the lessors if they have been in the industry for a good enough time and have a solid reputation among clients. Before meeting the leasing companies, be sure to check out their minimum qualifications and evaluate whether your business meets the criteria. This will help you save precious time that would have been otherwise lost in pursuing a lease from companies that would have never funded your business.
Even if a lease looks expensive in terms of total dollars, it will probably look like the cheaper option among all alternatives to fund your equipment purchase since you will only spend money over a period of time. If you are a brand-new business, you may face difficulties in securing a lease from top leasing firms. However, there are companies who will provide you with the lease you need, provided you are willing to pay more upfront or offer some interesting terms to them. Be sure to discuss your overall business plan and show enthusiasm during the meeting so that they can believe in your ability to run the company successfully.