In any business, there is equipment necessary for proper functioning. These can be large or small items from tractors to terminals, anything vital to the flow of business. Depending on the particular situation, buying or leasing equipment can be the best decision for your company. Leasing equipment is similar to renting equipment for a set amount of time but there are more options once the term has been completed. The company can either return the equipment, renew the lease, or purchase the equipment. Although over time leasing is more expensive than a single purchase there are many reasons a business may choose to lease.
Most businesses need equipment to operate at full capacity and there comes a time when a successful business requires new equipment to remain successful. Often, businesses do not have the resources to buy all the required equipment out of pocket, but the items are necessary nonetheless. This is where loans and leases come into play to fill the gaps in a business’ needs. Loans can be helpful, but they often require high down payments and significant monthly payments. Leasing equipment is especially helpful for businesses with low amounts of capital because they can get the equipment they need to stay competitive while paying manageable monthly payments. Many different companies may benefit from leasing equipment. In the following the different types of leases and possible benefits are explained.
Leasing the right equipment can be a huge benefit to a small business, but it must be the correct type of lease suitable to the business’ needs. Without a proper understanding of the terms used to describe leasing options, it is possible to become stuck in a lease that is not as beneficial as necessary or is even detrimental to the business.
The two main equipment lease types are capital leases and operating leases.
Capital Lease – This type of lease is most like a purchase. The equipment can be recorded on the company’s balance sheet during the duration of the lease. The monthly payments tend to be higher because the business is likely to buy the equipment at the end of term. Common types include a $1 buyout or 10% option lease where the equipment may be purchased for the final price of $1 or respectively 10% of the original value.
Operating Lease/Fair Market Value Lease – This type of lease is most like renting. The monthly payments tend to be lower than a capital lease. This is most ideal for equipment that needs to be upgraded frequently like computers because the equipment will either be renewed or returned at the end of term.
When deciding between the two archetypes of leases your goals as a business are the determining factor. If there is a desire to retain the equipment for a long period of time or indefinitely a capital lease is the better option. If the most important attribute is low monthly payments or retaining updated equipment than an operating lease is more suitable.
How Does One Benefit?
There are many ways to benefit from leasing options depending on the specific situation of a business. The most common reasons extend from issues with capital, requiring updated equipment, tax incentives or to maintain stability of expenses. In the following each reason is explained in further detail.
There are many reasons that a company may not have the capital to purchase the equipment necessary for a functioning business. For new businesses or when expanding it is very common for business owners to defer to leasing rather than buying equipment outright. Most leasing options come with very low or non-existent down payments and much lower monthly payments than a loan or line of credit.
It is also very common to use a lease on certain equipment to free up resources for more urgent matters. Sometimes although upgrades are necessary, they aren’t the most pressing issue. Leases allow the money that may have been caught up in equipment to be applied to more expensive or time sensitive issues.
There are plenty of companies that can and have gotten away with using the same equipment for years and years. Others are not so lucky. Most companies now require many electronics and updated technology to be competitive in the market. Depending on the industry, some companies are at a disadvantage as soon as their equipment is just the slightest bit dated.
For companies that need to change their equipment regularly leasing is the most attractive option. It is impractical to buy replacement equipment regularly so leases allow companies to obtain current items for the duration that they will be useful and necessary. It is practical to lease, especially if the equipment is not necessary for long term needs or if it isn’t certain that this is specifically the equipment that will suit the needs of the company. If the equipment is intended to be used for over five years and you are certain that it is useful then purchasing is perhaps the better option.
If the business is in the market to upgrade equipment from outdated owned equipment, often it can be beneficial to lease new equipment. Most leases will offer credit for a trade-in, saving much needed time and resources as opposed to trying to sell the old equipment on the open market.
For many businesses, taxes can be a large point of anxiety. Leasing equipment has built in tax credits under Section 179 of the IRS tax code, making leasing generally completely tax deductible. There is an annual maximum deduction of one million dollars; Provided the contracts meet certain terms and do not exceed the maximum the leases can be as much as fully tax deductible. This may provide some much-needed peace of mind for companies on the cusp of greatness.
When deciding between a loan and a lease it is often important to keep in mind that leasing rates offer more flexibility. Double Helix, who work with high risk credit card processing accounts, suggests leasing equipment as a way to ensure that monthly expenses remain stable instead of fluctuating with market pressures. Instead of a rate that is subject to variability like many bank loans, leasing has a set rate for the duration. This is very helpful in determining if the proposition is feasible for future business functioning. Another benefit includes the flexibility of lease financing, which can be extended to expenses associated with new equipment that cannot be financed by a bank loan. Examples include items like installation, sales tax, or employee training on new devices. Using financing for these items may further ease the burden of upfront costs allowing the business to function with as little upfront capital as possible.