Equipment leasing is turning out to be one of the most popular options for enterprises looking to acquire new equipment. According to the results of a recently concluded survey, 8 out of every 10 businesses in the US prefer leasing their equipment over procuring. This is, however, no surprise because other than being cheaper, equipment leasing comes with fewer ownership responsibilities, appealing tax advantages and a string of other attractive benefits.
If you're considering investing in an asset for your business but don't have enough capital for it, then you should consider equipment leasing.
Here is how it works:
What is Equipment Leasing?
In a layman language, equipment leasing refers to the process of obtaining equipment such as machines, software, or even a fleet of vehicles on a rental basis.
It's a great way to ensure your business has the necessary equipment to keep it up and running without having to invest capital.
How Does an Equipment Lease Work?
When you need a particular equipment but think it's not wise to invest in it or lack enough capital to get it, an equipment lease is a good idea. The leasing process works the same way as a rental agreement.
You, the lessee and the equipment owner, the lessor, draft a contractual agreement in which they allow you to use the equipment for a certain period in exchange for periodic payments.
During the period of the lease, the lessee can use the equipment as though they own it, while the lessor isn't allowed to repossess it until the end of the contract. In some cases, however, it's possible to break the lease before the end of the agreed period.
Nowadays you can lease anything. Therefore, if you just started a construction or service delivery business and in need of a commercial work truck, but can't afford, leasing is an excellent idea to get the job done, without compromising any of your plans.
Types of Equipment Lease
Even though there are many types of leasing, all leases fall under the two categories below:
A Capital Lease
This kind of lease is often long and non-cancellable. Businesses taking this option are expected to include it in their balance sheet as it's considered a purchase.
It's favorable for companies that need to use capital intensive equipment for a long time but don't have the funds to purchase it because
- The life of the lease is usually 75% greater than the asset's useful life.
- The agreement contains a bargain purchase option. Hence the lessee can opt to return or purchase the equipment it at a less than fair market value once the lease period is over.
- The owner transfers ownership rights to the lessee at the end of the lease period.
An Operational Lease
This is the most common lease. Unlike the prior, it doesn't affect an entity's balance sheet. It's also short term and cancellable.
You are therefore allowed to cancel the contract if you finish using the equipment before the lease period is over. This, however, comes with a penalty, and you also have to issue a notice.
Unlike in a capital lease, the lessor bears the risks of obsolescence. Thus, you can always request for upgrades.
Benefits of Equipment Leasing
As noted, equipment leasing comes with a host of benefits. Some of the most appealing ones include
- Allows you to channel your capital to the more pressing needs of your business instead of investing it in costly equipment.
- Keeps your business up and running by enabling you to get the required equipment even when you don't have enough capital.
- Some leases offer an old-trade in option. Hence allowing you to exchange your old equipment and get newer without having to spend too much of your capital.
- Equipment leases come with some appealing tax incentives.
Bottom Line
Equipment leasing helps all types, and all sizes of businesses keep their operations up and running. It also enables them to work towards ownership without disrupting any of their objectives.
It's especially ideal if the equipment in question is capital-intensive. Contact us for more information about equipment leasing and how we may be able to help you.
