While 80% of all US businesses have leased equipment at one time or another, some may not be aware of the benefits, nor of the hidden costs involved with leasing. Sometimes leasing equipment, instead of buying it, can be the best option for your business. However, there are many variables that should be considered, including costs, use restrictions, and legal implications.
Leasing operating equipment, such as computers, vehicles, and machinery, often makes more sense than buying. However, while favorable leases are often good bets, unfavorable ones can easily sink an emerging venture. While doing your legal homework can help prevent bad deals, it's always a good idea to have a lawyer look over a lease before signing it.
Benefits of Leasing Equipment
Leasing is Flexible.
Companies have different needs, different cash flow patterns, and sometimes irregular streams of income. For instance, startup companies typically are characterized by little cash and limited debt lines. Mature companies might have other needs - to keep debt lines free, to comply with debt covenants, and to avoid committing to equipment that may quickly become obsolete. Therefore, your business conditions - cash flow, specific equipment needs, and tax situation may help define the terms of your lease. Moreover, a lease provides the use of equipment for specific periods of time at fixed rental payments. Therefore, leasing allows you to be more flexible in the management of your equipment.
Leasing can be Cost-Effective.
Equipment is costly and some of the costs are unexpected. When you lease, your risk of getting caught with obsolete equipment is lower because you can upgrade or add equipment to best meet your needs. Further, your equipment needs can change over time due to changes to your company, such as diversification. Leasing allows you to stay on the cutting edge of technology.
Leasing Has Tax Advantages.
Rather than deal with depreciation schedules and Alternative Minimum Tax (AMT) problems, you, the lessee, simply make the lease payment and deduct it as a business expense.
Leasing Helps Conserve Your Operating Capital.
Leasing keeps your lines of credit open. You don't tie up your cash in equity. Also, you avoid costly down payments. With other advantages such as off-balance sheet financing, leasing helps you better manage your balance sheet.
Although leasing does provide benefits to business owners, there are hidden costs to deal with, and business owners need to be aware of such costs.
Hidden Costs of Leasing
When entering into a lease contract, the business owner agrees to make all the lease payments to the end of the term. While there is no penalty for early payoff, the full payments are normally required to pay off the lease early.
These fees are administrative costs due upon signing the lease and range from $50 to as much as $350 or more, depending upon the complexity of the lease contract and size of the transaction.
These are fees required by the Secretary of the State where the equipment is being leased. The fee is usually is a one-time percentage that is due upon signing the lease documents.
In most states, there is a tax on goods purchased. Some states tax at 5 or 6%, or more. The tax is factored into the lease payments, so be prepared to calculate this cost, as it could increase your monthly lease payments $20 or more per month depending upon the total cost of the equipment, and the state of purchase.
A section in the lease documentation will require that the equipment be covered by insurance. Here the leasing company is protecting their interests. They want to make sure they will be fully compensated for the equipment in the event of fire, theft, flood, etc. Most business owners will already have adequate insurance on their building to cover such equipment (if it is contained and used inside). However other companies using more portable equipment (such as lift trucks, golf carts, hydraulic lifts, bulldozers, etc.) may need to take out additional insurance to assure adequate coverage.
The bottom line is that when you are deciding to lease equipment, be certain you are aware of all costs involved with the transaction. Then balance them against the benefits to choose the appropriate choice for you and your business.