As an entrepreneur, you will probably have a need for a variety of business equipment when starting up, expanding, or branching out into new avenues of business. Today, many business owners are finding it advantageous to lease equipment rather than purchase it.
One of the primary benefits of leasing is being able to acquire equipment without significantly affecting your cash flow. This is particularly important for a new business with limited financial resources. Although leasing may mean you are spending more money over the long haul, the initial layout is much less than the cost of a major purchase. This will free up cash for your day-to-day operations or to meet other needs. In addition, it is typically easier to pay a lease than it is to obtain a loan for equipment purposes.
Of course, the benefits of leasing equipment depend on the nature of the equipment. One New York–based public relations firm, which is no longer in business, actually spent several hundred dollars a year leasing a coffee pot! Obviously, you need to determine the cost of the item were you to purchase it and the cash saved by leasing it. In addition, you want to consider whether or not there would be any resale value if you were to own the equipment.
Companies normally lease larger high-tech equipment such as computers and office copiers. The advantage in leasing such equipment is that you can keep up with the rapidly changing technology without having to constantly make major expenditures. A computer, along with other hi-tech equipment, depreciates very quickly. In fact, many hi-tech tools become obsolete almost as soon as they are out of the box, with newer models constantly being designed and marketed. Leasing allows you to have the newer models in your facility every two or three years, rather than spending thousands of dollars upgrading your computers.
Typically, leasing is most attractive for costly equipment that you will either need for a short period of time or that will quickly become outdated. However, if you require a major piece of equipment that you will use for the next 15 years and that will not become outdated, it may be more cost effective to purchase the item instead.
Of course, before you lease any equipment, you need to read the lease agreement very carefully. It is imperative that you understand the leasing terms. Who is responsible for any possible damage? Who will pay to repair the equipment should it become defective? Are there additional fees included? Can the equipment be upgraded? If you need to terminate the lease early, how much is the early termination fee? Can you purchase the equipment at fair market value when the lease terminates? You need to answer each of these questions and make sure the terms meet your needs. There are many equipment-leasing options available, and you should evaluate the pros and cons of each option before signing a lease agreement.
There are also some tax benefits to leasing. If you choose an operating lease, your payments are considered operating expenses and you can deduct the monthly payments on your taxes. A finance lease is considered debt and the depreciation of the equipment can be deducted. Such a lease also includes the option to buy at the lease termination.