Equipment leasing is an option that allows companies to acquire everything from restaurant equipment to corporate aircrafts without the initial outlay of cash.
The basic concept of leasing is the borrowing of equipment over time in exchange for money through a long-term capital investment (renting to own over a period of five to seven years) or a short-term operating lease (the option to purchase or return the asset at the end of the contract period).
There are many advantages to leasing equipment:
- Financing: The option to use equipment-leasing companies can allow startup and expanding companies to purchase or borrow new and used equipment without the initial cash output, often allowing 100 percent financing, where the loan method may require a deposit of up to 25 percent.
- Credit: In the current economic climate, cash flow can be tight and companies can find it difficult to obtain bank loans for equipment. According to the Equipment Leasing and Finance Association, credit standards have remained stable at a 74 percent approval rating. This typically makes it easier to get approval for an equipment lease. In addition, leases usually do not show up on credit reports like loans do, so the credit rating may not be as adversely affected.
- Balance sheet: As long as current tax standards remain the same, leasing is a line item on a balance sheet and not a loan, so it is an expense rather than a capital expenditure. Payments are typically a set monthly amount, so there are no disbursement surprises.
- No more obsolete or old equipment: Leasing can allow companies to afford better quality equipment as well as upgrade technology regularly.
But leasing can add to the costs of acquiring equipment over time, which ultimately makes it more expensive vs. purchasing the equipment directly, in which case a company may not be able to depreciate the equipment. The equipment does not belong to you unless you exercise the option to purchase. Until then, the following maintenance and return provisions may be in effect:
- The leasing company owns the equipment.
- The equipment must be returned in the same condition as when delivered.
- It must be used for its intended use.
- Insurance, which is typically provided through the leasing company, must cover the item.
- The equipment cannot be altered.
- You can expect to be locked into a contract for the life of the lease.
The financing process can also include the following requirements:
- You may be expected to provide financial statements and credit scores.
- Some financial institutions may require your company to be in operation for three years.
- You may be expected to provide a personal guarantee.
- A letter from a certified public accountant may be required.
Leasing equipment may not be ideal for all companies, but if you decide to do it, you should make sure to look for competitive pricing by getting several quotes and finding out who is financing the lease. Is the lease financed through a broker who can shop for various lenders or through an independent financer?
Ultimately it is important to calculate the cost of the equipment over the life of the lease to determine whether the return on investment offsets the additional expense of leasing vs. buying outright.