Cash-starved businesses may want to consider leasing, rather than buying, equipment. Leasing affords you access to many types of equipment: computers, copy machines, fax machines, trucks, and more. And while leasing doesn’t bring cash in the door, it does reduce the amount of cash you’ll need to raise for your business.
When you lease equipment, a manufacturer, dealer, or lender either buys or already owns the equipment you want. In exchange, you make monthly payments to the owner (lessor). The monthly payment structure allows you to treat the payments as tax-deductible business expenses.
Leasing also makes it easier to keep pace with technology. This is especially important if your business relies upon cutting-edge technology such as the latest computers, communication devices, or other equipment. A series of short-term leases will cost you less than buying new equipment every year or two. Some leases even have yearly computer upgrades built into them — eliminating the difficult decision of whether you can afford to upgrade.
If you need equipment right away, leases are approved much more quickly than loans, and involve less paperwork and more relaxed credit requirements. Many equipment vendors provide lease financing, as do a number of banks. For early-stage businesses, equipment lease financing is more easily obtained from a vendor than from a bank.
Ultimately, leasing equipment will likely prove more costly than buying, but if cash flow is an important issue, then leasing is an attractive alternative.
If you do decide to lease equipment, keep the term short — two years is ideal. Try to negotiate a “modern equipment substitution clause” that lets you update or exchange your equipment, so you don’t end up paying for obsolete technology. And insist on a cancellation clause that lets you pay a fee to cancel the lease. Be sure to note the cost of any cancellation penalty.