Equipment Leasing Options: Critical Factors to Consider in Lease Financing

Business.com / Business Solutions / Last Modified: June 5, 2017
Photo credit: Daisy Daisy/Shutterstock

Information on equipment leasing and how financing options are critical when you lease equipment with solid knowledge on residual value of your assets.

Lease financing options require that business owners/financial managers investigate their options when you acquire equipment or technology assets. Equipment leasing provides you with a combination of rights and obligations. We weigh those risks and benefits for you to consider.

One critical area is the type of lease you choose and any residual values associated when you lease equipment. These residual values may represent an additional significant profit to the lease company in the transaction. Are there ways you can actually profit from the type of lease you choose? There are, and we will demonstrate how.

The residual value is a solid portion of the lenders over all "return" on the transaction. Again, lessor return often equates to lessee shortfall, and you are the lessee. At the end of the term of any lease, there are options that any savvy borrower should both negotiate and understand. If you enter into a true operating lease then you have the option to return the equipment to the lessor (or maybe it is the manufacturer itself) when the lease transaction has terminated. 

Many major manufacturers of equipment, computers, etc. have large in-house leasing divisions which are profit centers for their financing options they provide customers.

When the equipment is returned the lessor re-sells the equipment, or in some cases actually rents or leases out the equipment again, obviously on a "previously used" basis. In the construction or aircraft industry assets can be used as long as 10 - 20 years.

Ultimately, borrowers need to understand that the potential profit the lender/lessor realizes on a transaction hinges significantly on the final value of the asset at the end of the term.

For example, if a customer purchases something for a value of $100 and wants to lease it, the lessor will perhaps estimate that the equipment will be worth 10 percent of its original value, or in our case, $10 at the end of the term of the lease. He will often base his rate on the expected recovery. Naturally the lender could receive more or less at the end of the lease term - he bases his price and interest rate accordingly.

Borrowers therefore might want to significantly investigate the residual value being contemplated in this type of operating lease transactions, and, in some cases, invoke their right to buy the equipment at the end of the lease. It could in fact be resold for a profit if the company has a strong sense the asset will maintain its value. Again, think aircraft and construction equipment in the equipment leasing example we used.

Naturally lease companies want to earn a profit - the question becomes what a reasonable profit is and is at your firm’s expense? 

Speak to a trusted, credible and experienced equipment leasing advisor who can provide you with real financing options when you lease equipment that make sense from your perspective, the borrower.

Login to Business.com

Social Login
Login with Your Account
Forgot Password?
New to Business.com? Join for Free

Join Business.com

Sign Up with Your Social Account
Create an Account
Sign In

Use of this website constitutes acceptance of the Terms of Use, Community Guidelines, and Privacy Policy.

Reset Your Password

Enter your email address and we'll send you an email with a link to reset your password.

Cancel