Business Guide To Equipment Leasing

One of the biggest expenses a business owner faces is equipment. From office machines and copiers to large tools and mechanical equipment, leasing may be an affordable option. Determining if equipment leasing will work for a particular business is a matter of deciding what funds are available and how to best allocate them. Leasing the equipment needed to start a business can help the business owner conserve cash and allow for a purchase to be stretched out over time, without resorting to using credit. Researching any pitfalls in advance can help the small business owner make the most of his equipment budget.

Benefits

Conserving Cash

One of the biggest benefits of equipment leasing is the ability to save cash. This is very important for new companies or start-up companies. Your money is not tied up in purchasing equipment for your company. Instead you can use your working capital for other items, such as marketing and operating expenses.

Pay Only for What You Use

Leasing allows you to make money off the equipment that you need. There is no need to purchase equipment that you may only use once a month. You can lease the equipment as it is needed and save money on maintenance costs that come with ownership. If you purchase the equipment and only use it once a month, it is not paying for itself. Leased equipment pays for the rental payments immediately.

Easy Upgrades

Purchasing equipment is risky because of changing technologies. Equipment companies are always finding new and easy ways to do things. If you spend a large amount of money on one piece of equipment, it could become obsolete within a matter of months. Leasing allows you to take advantage of new and better equipment each time technology changes.

Tax Benefits

Loan payments offer no tax benefits to businesses. Leased equipment may be completely tax deductible as an operating expense at the end of the fiscal year. This will save your company money on taxes.

Budgeting

It can be difficult for businesses to purchase new equipment and stay within the company budget. Often a company will have to save money and work toward the purchasing of new equipment. Leasing is often approved quickly because of the low leasing payments each month. Leasing can usually fit into the tightest of budgets.

According to the Small Business Administration, “$265 billion of equipment was leased in 2008, and 89 percent of lessees say they would lease again.”

Pitfalls

While equipment leasing can save you some capital when your business is first starting, there are some very important pitfalls to consider. Regardless of the industry your business is in, the same points about leasing equipment apply. That is, medical companies have to take into consideration the same points as a construction company or a restaurant when it comes to equipment leasing.

Condition of the Equipment

Sometimes, when you lease equipment, you will end up with equipment that has been previously used. Leasing used equipment is usually less expensive than leasing new equipment, but in the long run, you may end up spending more since you will be responsible for fixing the equipment. If you opt to lease used equipment for your business, be sure that there is a warranty provided to protect your company from unnecessary expenses.

Cost of the Equipment

Because of the lease fees, the cost of equipment leasing is considerably higher than the cost of buying the equipment outright. Forbes states that you may end up paying $5,760 on a lease option plan for an item that you can buy outright for $4,000. These fees are often much higher than finance fees associated with other financing options, such as business loans or purchasing the item on a credit card. If you must use a lease purchase option, verify that there is an option available for early payoff, and try to pay the equipment off as quickly as possible to minimize the amount you will have to pay in fees.

Terms of the Contract

Some business equipment leasing contracts leave you unable to stop paying for the equipment if you don’t need it anymore. You will still have to pay the full purchase price for the equipment. In some cases, you may end up paying more for your equipment than its current worth. This is common if you are buying a piece of equipment that depreciates in value quickly, or if a new version of the piece of equipment is released.

Lack of Ownership

Until you make the last payment on the equipment, you don’t own it. This means that for bookkeeping purposes, the equipment is actually a liability instead of an asset. If you are applying for financing or if you are looking for investors in your company, the equipment leasing contract and cost on your books can be the deciding factor that leads to the conclusion that your company isn’t a good fit for the loan or investor.

Pricing

Equipment Operations

One commonly overlooked cost with any type of equipment leasing is the cost to employ an equipment operator. In a recent study done by the Bureau of Labor Statistics, there are a large amount of equipment operating jobs due to the fact that there is usually a lack of candidates who are actually qualified in the profession. The average hourly wage for most employees operating heavy equipment is $19.12 nationwide. Depending on how many pieces of heavy equipment your company is planning on leasing, the cost of just running the equipment can quickly add up if careful planning is not taken prior to leasing.

Conclusion

Leasing equipment offers a new or existing business owner some attractive options, including the chance to reserve cash for other purposes. Equipment leasing also prevents overbuying, a common error that befalls new business owners. Leasing offers some tax advantages over buying equipment outright as well.

Some of the downsides of leasing include the condition and cost of the individual pieces of equipment. Because the business won’t actually own the equipment, it can’t be listed as an asset. Terminating an equipment lease early can lead to excess charges and penalties; consulting the lease can help a business owner avoid penalty charges.