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Short on cash, but need equipment? Consider leasing what you need.
Leasing equipment may be a better alternative to buying, depending on
your situation and needs.
Today, leasing is common practice in business. Over the past two years,
equipment leasing has risen approximately 20 percent, according to
recent research by the U.S. Small Business Administration (SBA). And 8
out of 10 U.S. businesses lease all or part of their equipment, reports
the Equipment Leasing Association.
Leasing is appropriate for just about any business at any stage of
development. For start-up businesses with no revenues, smaller
leases—those of $100,000 or less—may be better managed on the personal
credit of the owners—if they are willing to make the monthly payments.
Comparing Leasing to Buying When you buy a piece of equipment or
vehicle, you usually have to pay for it in full either by using cash or
by financing the balance. After you finish paying for it, you own it.
Equipment leasing, on the other hand, is essentially a loan. The lender
buys and owns the equipment and then "rents" it to a business at a flat
monthly rate for a set number of months. At the end of the lease, the
business has several options. It can purchase the equipment for its
fair market value (or a fixed or predetermined amount), continue
leasing, return it or lease new equipment.
With a lease, you actually only pay for using the equipment. But at the
end of the lease period, you could end up owning nothing. So why lease?
The answer is simple: By leasing equipment, you leave money in the bank
that can be used for other purchases. Since lease payments are usually
smaller than regular loan payments, you don't have to pay out as much
each month.
However, keep in mind that a lease is not cancelable like a bank loan
or other debt. If you need to get out a standard loan you can sell the
equipment and pay off the loan, or even refinance it. With a lease, you
generally have to pay off the lease in full. So you have to be sure you
make the payments when you enter into a lease.
So what kinds of equipment make the most sense for a small business to
lease? According to research by the SBA, the most common items leased
are office equipment, computers, and trucks and vehicles.
Benefits of Leasing Leasing equipment offers a wide range of benefits,
from consistency with expenses to increased cash flow. But perhaps the
most significant advantage of leasing is the ability to maintain
up-to-date equipment. Leasing allows you to easily and affordably add
equipment or upgrade to a complete new piece of machinery to meet
future needs. This lets you transfer the risk of being caught with
obsolete equipment to the leasing company.
Here are some other benefits of leasing:
• Alternative to financing - Leasing is essentially an alternative to
traditional financing and can be great for companies not able to obtain
business loans.
• 100-percent “financing” – In many cases, leasing requires no down
payment. This allows you to “finance” an entire purchase, including
software, hardware, consulting, maintenance, freight, installation, and
training costs.
• Ease and convenience - Applying for a lease is easy, and lease
arrangements can be structured to meet your individual requirements.
Equipment leases can range from $ 2,000 to $ 2 million. For smaller
amounts, you can complete a brief application and receive a final
decision within days—often with no financial reports or tax returns
needed. Leases for more than $100,000 generally require detailed
financial information from the business, and the leasing company
conducts a more thorough credit analysis than it would for a smaller
• Flexibility - Lease terms range from 12 to 60 months, depending on
the equipment type. Most leases can be structured so that payments are
made with operating rather than capital funds. This can eliminate or
reduce capital budget delays. Leased equipment can be purchased later
if capital becomes available. Plus, a percentage of the lease payments
can be credited toward the purchase of the equipment.
• Fixed, predictable payments - Having fixed lease payments enables you
to accurately predict the impact of equipment expenses on your cash
flow.
• Conserves working capital - Leasing conserves your working capital by requiring only a minimum initial outlay of cash.
• Tax Advantages - Operating leases are generally treated as a
100-percent, tax-deductible business expense paid from pre-tax earnings
instead of after-tax profits.
• Protection against inflation - Lease payments are based on the
dollar's current value. And unlike bank lines of credit with
fluctuating rates, your payments are fixed regardless of what happens
to the market tomorrow, making it easier to budget, forecast and grow.
Working with a Leasing Companies When leasing equipment, keep in mind
that the company selling the equipment simply makes a direct referral
to a leasing company with which it does business. And, usually, the
company selling the equipment works with more than one leasing company.
So be sure to get quotes from a number of leasing firms. It’s also a
good idea to ask for referrals from friends and business associates.
Additionally, make sure you understand with whom you’re dealing. Are
you talking to a broker—the person who simply structures deals, then
gets them financed through any of the leasing companies he or she works
with. Or are you dealing with a leasing company that is actually
putting its own funds on the line?
Brokers can be beneficial because they have valuable insight about the
leasing market and can help you find the best leasing solution for your
needs. But as when dealing with any type of salesperson, you are
responsible for handling the due diligence. Do your own homework to
ensure you negotiate the most favorable lease agreement for your
company.
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