At one point or another, the majority of businesses have leased equipment without fully understanding the benefits or costs of equipment leasing. Before leasing equipment, business owners should consider all of the variables including use restrictions, legal implications and costs before determining if they should lease the equipment or buy it.  Often times, leasing equipment can end up being the best option for businesses to obtain high quality business equipment and save capital. 

To understand how effective equipment leasing can be, it is important businesses understand all of the aspects of equipment leases. 

Advantages of Equipment Leases

Flexibility.  Every company has different needs.  Income can be irregular and each company can have varying cash flow patterns. For example, new companies that are just starting typically have limited cash resources and a limited amount of credit lines. Companies that are more mature have other needs such as to avoid debt or to avoid committing to equipment purchases that might become obsolete quickly. The business’ specific conditions should help define the lease terms including the business’ cash flow, tax situation and equipment needs.  An equipment lease allows the use of the equipment for a set period of time with fixed rental payments.  Leasing, therefore, allows a business to be more flexible in the management of their equipment. 

Small Initial Investment. One of the primary advantages of equipment leasing is that it allows a company to acquire high quality assets with a minimal initial expenditure. This allows a business to obtain the equipment needed to run the business without significantly affecting the cash flow. 

Conserve Operating Capital.  When a company leases equipment, they save their cash that would be spent if they were to buy the equipment outright. Additionally, leasing does not affect a business’ credit lines.  Credit lines can be saved for other necessary business expenses. There are other benefits including off balance sheet financing which would allow the company to manage the balance sheet better. 

 

Cost Effective.  Business equipment can be costly.  Leasing equipment reduces the chance of being stuck with obsolete equipment because most business equipment leases all for upgrades or additions to meet the business’ needs.  Leasing lets a company stay on top of the cutting edge of technology with reasonable fixed rental payments. 

Tax Benefits. Equipment lease payments can be deducted as a business expense. Businesses will not have to deal with complicated depreciation schedules or Alternative Minimum Tax issues. Since lease payments are deducted as business expenses on their tax return, the net cost of the lease is reduced. 

Maintenance.  Many leasing companies will take care of the maintenance of the leased equipment. This can take a huge burden off of a company because they will know any problems will be taken care of immediately when an issue occurs.  Leasing companies usually receive a discounted rate on labor costs and replacement parts if something needs to be fixed. This can save the company a lot of money when there is a problem with the equipment. 

Costs of Equipment Leasing


Non-Cancelable Agreement.  Equipment leases must be paid until the end of the lease term.  There is usually no penalty to pay the lease off early; however, full payments are normally required in order to pay it off early. 

Document Fees.  Equipment leases have administrative costs that are due upon signing. These costs range from $50 to more than $350 depending on the amount of the lease and the complexity of the contract. 


UCC-1 Fees.  The Secretary of State requires fees be paid in the state where the equipment is leased. Normally, this is a one time fee that is to be paid when the lease documents are signed 

Taxes.  In some states, there is a tax on goods purchases that is factored into the monthly lease payments. This tax could increase the lease payment approximately $20 or more depending on the state the equipment was purchased in and the total cost. 

Insurance. The lease agreement will require that the equipment be covered by insurance. The leasing company requires insurance to protect their interest to ensure they will be fully compensated in the event of theft, fire, flood, etc.  The majority of businesses already have more than enough insurance on their building to cover the equipment; however, they may have to take out additional insurance for portable equipment. 

Potential Disadvantages of Equipment Leasing

 
Higher overall cost.  Most of the time, leasing equipment is more expensive then purchasing it with cash.  There is interest and fees that must be paid according to the leasing contract. 

The equipment is not owned by the business.  Since the business does not own the equipment, the company does not build equity on it.  Unless the leased equipment becomes obsolete by the time the lease ends, the lack of ownership can be significant disadvantage.  Some leases offer a buyout option at the end of the lease, so the business can purchase the equipment at a reasonable cost. 

Lease payment obligation.  Businesses are obligated to make all of the lease payments until the contract ends even if they are no longer using the equipment. Some lease contracts include an option to cancel if the business equipment is no longer necessary; however, there are large terminations fees that apply. 

Usage restrictions.  Some leasing contracts limit the amount of usage that is covered during the leasing period. For example, copy machines might allow for 100,000 copies per year. If more usage occurs during the leasing period, they leasing company charges specific fee as stated in the leasing contract. 

When a business is deciding if they should lease equipment or buy it, they should calculate the approximate net cost of the equipment. They need to factor in any potential tax breaks and resale value.  This will help determine which option will be the most cost effected.  Consider the business’ specific needs including need for flexibility, cash availability and tax benefits. Leasing is not the right option for every business; however, leasing equipment is a good alternative to buying equipment and might be just what is needed to help the business succeed.