20 reasons to lease equipment

20 reasons to lease equipment

There are many advantages to leasing, a method of financing equipment that has been popular for many years. It provides some very unique advantages over conventional bank financing or outright purchase, and here are 20 reasons to lease equipment.

1. Pay as you use

Leasing emphasizes the utility of the equipment. In other words, leasing provides an opportunity to pay for equipment as it generates revenue for the company. No different than paying employees bi-weekly or monthly as opposed to pre-paying them for the next 2 or 3 years of work. Both are company assets and there is no point in prepaying for both.

2. Payments are fixed

In most cases, lease payments are fixed for the term. This has a major advantage over conventional bank loans or credit purchases, where the interest rate is usually based on a floating rate. Knowing in advance what the payments will be makes budgeting easier and reduces interest rate risk.

3. Longer terms / lower payments

Many banking institutions will limit the loan term to 12 or 24 months, at which point the loan rate and terms are renegotiated. Based on the useful life of the equipment being leased, it is not uncommon to see fixed lease terms of up to 48 or 60 months. This effectively lowers the monthly payment at a fixed rate.

4. Protection from aging

In this era of great technological advancement, some types of equipment purchased today may become obsolete within a year or two. Most leases offer a provision to economically upgrade the equipment within the last year of the lease, thereby providing the company with built-in protection against obsolescence. In addition, although the leasing company holds title to the equipment, it will usually allow the seller to provide a replacement for the existing equipment.

5. No advance payment

Conventional banking institutions will typically require a 10%-25% down payment to undertake financing on most equipment. In a lease transaction, the entire amount is financed, with only the first or first and last payment required at the time of the lease. In some cases, when the financial strength of the company is not enough to support the amount being rented, a small down payment may be required.

6. 100% financing

Traditional financing methods often do not allow soft costs such as installation, transportation, maintenance and software to be included in the loan. They must be paid directly from working capital. Leasing, on the other hand, will allow soft costs to be included, thereby preserving working capital and allowing for a single monthly payment for the entire acquisition.

7. Quick and easy

Depending on the dollar amount of the acquisition, a traditional loan can take many days and require approvals from higher levels at the financial institution. This may mean a delay in receiving the order for the much-needed equipment. The credit process for acquiring a lease is usually much faster and can take from a few hours to a few days. Again depending on the size of the acquisition.

8. Creativity and flexibility

Banks are generally known for their creativity and flexibility. They are bound by the Banking Act, which limits some of the things they can do to help their customer base. Leasing, on the other hand, has become a financing method that focuses on the specific requirements of the customer. Payments can be structured to accommodate irregular revenue streams throughout the year, or set up to match paying off a piece of equipment that has quantifiable monthly savings. Leasing is the best form of creative financing.

9. Purchase and Renewal Options

At one time, leases were structured in such a way that the only purchase option available was the fair market value of the equipment, determined at the end of the lease term. Over the years the market has made it clear that they want a better defined purchase price set at the beginning of the lease. As a result, most leasing companies will set a mutually agreed purchase price at the end of the term at the beginning of the lease. This can range from $1.00 to 25% and is often reflected in the monthly payment. In addition, the purchase option can again be refinanced under a new lease agreement usually for a period of 12 to 24 months.

10. Preservation of working capital

In a recent industry survey, the number one reason for leasing equipment is the working capital conversation. Using lease financing frees up working capital to be used in the day-to-day operations of the business for things like purchasing inventory, advertising, trade shows, and hiring employees. Essentially, leasing allows the company to reduce the amount invested in a depreciable asset and use the money where it will generate a higher return.

11. Simplified forecasting

Lease payments are shown as an expense on the company’s income statement. Because payments are fixed and predetermined at the beginning of the lease, companies are able to intelligently forecast and budget into the future.

12. Capital budgets to operating budgets

In large organizations, capital acquisitions typically require a higher level of approval than operating expenditures and, as a result, take longer. Lease acquisition, which is a monthly expense, usually falls within an operating budget, allowing managers in various departments or business units to approve the acquisition of much-needed equipment.

13. Tax reliefs

Because lease payments are treated as an expense on the income statement, the payments can usually be written off. Because each company has unique financial circumstances and accounting firms differ in the accounting treatment of leases, it is recommended to consult with the accounting firm before deciding to lease based solely on tax benefits.

14. Low interest / no interest programs

From time to time, equipment suppliers will offer time-sensitive marketing programs with low or no interest to help them sell slow-moving inventory. It’s wise to keep an eye out for these types of programs or ask the seller if any lease incentives are available.

15. Master Leases

The master lease agreement is simply a document that contains all the terms and conditions of the lease and is signed once and covers all future lease acquisitions. Typically, the lease line of credit is pre-approved for a dollar amount that will cover the expected acquisitions over a period of time. When equipment is acquired, a simple one-page document is signed. This saves time and is efficient in an expansion or large project.

16. Keep bank lines of credit

No company wants to operate at the top of its credit line and is often reluctant to approach the bank for a credit line increase. It is a sound business practice to have funds available for unexpected events – a slow month or quarter, unpaid receivables or an unexpected damage claim. The use of leasing creates a new credit facility without any effect on the banking relationship.

17. Hedging against inflation

A lease allows payment in dollars, and in turn, these costs are paid incrementally in increased future dollars as the equipment is used.

18. Competitive Advantage

Staying ahead of the competition often requires the latest and greatest technology. Leasing equipment allows you to do the job more efficiently, more efficiently and more economically. In addition, it provides the advantage of continuously upgrading to the latest technologies available at a reasonable cost.

19. Sale and Leaseback

A sale and leaseback is a specialized leasing transaction where the leasing company will purchase unencumbered equipment at fair market value from a company and lease it back to them. This is a great way to free up capital that is tied up in depreciating assets.

20. Improved corporate image

The vehicles in the fleet and the equipment in production have an impact on the corporate image. Leasing allows assets to look new, fresh and create an image of a successful company.

In summary, leasing has emerged as a means of acquiring equipment and it is no wonder that many equipment manufacturers have created their own leasing divisions to help their customers acquire products in the most efficient way. Leasing just makes good business sense.

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