As an owner of a business, it may not always be possible for you to have enough cash to buy equipment outright. In this situation, leasing the equipment may be the right option for you. It is a popular method for businesses all over the world to keep them up to date with technology. Leasing is also popular with businesses because substantial down payments are usually not required and it allows them to use scarce cash resources for other operational aspects of the business. The other reason why businesses prefer to lease equipment is because lessors usually allow the old equipment to be traded in. This relieves the business of having to deal with the obsolete equipment. Equipment leases also qualify for tax credits.
Before Getting Started
Before you sign up on the lease documentation, it is vital that you have satisfactory answers to certain issues. Even though opting for leasing enables you to take advantage of monthly payments that are substantially lower, you still need to factor in the payment into the cash flow. Since the cash flow will have its limitations you need to allocate a monthly budget for the payment towards the lease agreement. Leasing will also almost always work to your advantage if the term of the lease is short; however, if the period of use is going to be more than three years then buying the equipment with a standard loan or line of credit could be less expensive. Leasing is also a more viable option when the equipment has a tendency to become obsolete fast as the equipment can just be returned to the lessor and an agreement for more technologically advanced equipment be executed.
Equipment That Can Be Leased
The range of business equipment that can be leased is virtually unlimited; however, attention needs to be paid on a couple of conditions, such as the purchase price and whether it is a hard asset. The best use of a lease is done when a business takes advantage of it to acquire equipment that is more expensive, which would not have been possible to be bought outright or with a standard loan requiring a substantial down payment. The nature of the equipment could range from single items that are very costly, such as mining equipment or a whole bunch of less expensive items like touchscreen kiosks. The lease agreement will be for a value of at least $3,000 while there are many lenders who will only look at agreements extending to more than 20 times that.
The other aspect of business leasing is that the nature of the asset should be “hard”, which means that the asset should be tangible and be able to be detached from the place it is sitting on. The reason is simple; if a borrower defaults on the lease payments then the asset should be capable of being seized by the lender and sold to recover the money.
Equipment Purchase Profitability
The extent of the profit that can be generated with the purchase of any equipment is largely determined by the method selected to finance it. This makes it an extremely critical step in the purchase process. While equipment leasing often represents one of the most attractive options, a business owner retains the freedom of choosing from the other options available depending upon how financially stable the business is and how large its cash flows are. Before purchasing equipment for the business you should sift through all the alternatives available and decide for yourself, which one works to your best advantage.
One of the aspects of leasing that needs serious investigation is the terms and conditions governing the premature termination of the lease agreement. Usually, if you want to retire a lease before the documented expiry date, you will need to pay extremely stiff penalties, which usually do not make the exercise worthwhile. Leaseholders now, however, have the option of using online platforms that have been established solely for the purpose of matching sellers and buyers of leased equipment. The transaction costs are not too much considering the flexibility you get but you do need to take the issue up with your lessor to find out how easy or difficult it would be for you sell off your existing lease.
Author bio: James Crawford is a business taxation expert. He is a prolific writer on various aspects of business finance and provides consultancy to a number of companies, including online businesses like http://www.leasequit.com/.