Equipment leasing and how it works
All you needed to know about equipment leasing
Entrepreneurs may opt for equipmentt lease financingrather than investing cash in machinery that may become obsolete over time or increase overhead expenses. Technology, especially in electronics, changes so rapidly that corporations often prefer leasing computers, laser printers, copiers, and even telecommunications systems rather than buying. Business owners reason that money spent upgrading or purchasing new equipment to keep pace with technological advances every few years could be better
utilized by entering into either a “true” or a “finance” lease agreement. Another consideration for leasing over buying is simply to keep down overhead. Many companies, especially startups, cannot afford to furnish offices full of computer systems, desks and chairs, and file cabinets without breaking the bank. Long term rentals level the playing field between large corporate moguls with limitless funds versus small businesses with limited operating capital.
When businesses need machinery, computers, or copiers but lack the cash, they often opt for a true lease agreement which is similar to renting a piece of machinery or furnishings for an extended period of time with the intention of exchanging, or upgrading items at the end of the term or when newer models become available. Lessees have the advantage of having access to state-of-the-art tools and accessories without paying top dollar. True equipment lease financing may be more popular because monthly installments tend to be lower than a finance agreement, which works similar to buying on an installment plan. Companies which offer business accessories on a true lease can make more revenue by renting items again and again to various individuals and businesses. For example, a company leases a copier to a small firm for one year, at the end of which the lessee decides to upgrade to a pricier model with more features. The copier company has the option of leasing the older unit to another business owner, and another, until the original wholesale price of the copier has doubled or even tripled, especially when financing fees are added.
Certain types of long term equipment lease financingallows business owners to eventually own the machinery, computer, or copier at the end of the agreement or simply terminate the agreement and rent another piece of equipment. Finance leasing offers business owners an installment plan which works similar to buying an automobile or other big ticket item. All monthly payments go towards the purchase of the item; and lessees only need to make a buyout payment to transfer ownership, unless they decide to rent another piece of equipment under a separate agreement.
Unlike eternal life in Christ, copiers, telecommunications equipment, faxes, computers, and printers on long-term equipment lease financing are not expected to last a lifetime and usually require maintenance. Since rental agents retain ownership of all items, providing regular maintenance ensures that their investment is protected from user neglect or disrepair. Business owners who purchase machinery and supplies without leasing bear the burden of paying for maintenance and repair, usually covered under a separate agreement and subject to additional fees.
Flexible equipment lease financing can vary according to a business’ cash flow or longevity. Rental companies realize that a startup business may need time to realize a profit and make monthly payments, therefore some contracts start out with low payments which gradually increase over a period of time. Called a step lease, this kind of financing is more flexible than being locked into a rigid installment contract. As the business profits, lessees are more able to handle increased overhead expenses, including rentals. Some flexible plans might also offer lessees an opportunity to rent for one to three months without a payment in order to ease the financial burden of starting a new enterprise. Not uncommon are contracts which allow renters to keep merchandise for up to one year without making a payment; however when installment plans kick in, they can include some hidden fees and interest rates.
Long-term equipment lease financing also has its advantages at tax time. The value of purchased machinery and computers must be depreciated each year; however rental payments are 100% tax-deductible if utilized solely for business purposes. Owners can realize a tax break by deducting monthly payments, maintenance fees, and supplies as part of overhead expense. However, state and federal revenue departments may view rental payments as installments towards a purchase and require that equipment be depreciated, rather than deducted at 100% of its value. Entrepreneurs considering long term leasing may want to consult with tax professionals or certified public accountants to determine which type of agreement offers the best deduction.
Dealers or manufacturers of office furnishings or machinery usually have an in-house department or an independent agency which specializes in equipment lease financing. The independent agency or onsite department buys the item and loans it back to the customer for a specific monthly installment deducted from the purchase price at the end of the term, or a monthly rental without expectation of a buyout. Individuals and corporations who opt for lease financing will need to have good to excellent credit and submit banking information to rental companies. Consumers can find leasing firms online or in the local business directory; however most local dealers and suppliers will refer customers to a preferred agent. Before signing on the dotted line of short- or long-term contracts for equipment lease financing, entrepreneurs should read the fine print, especially when it comes to terminating the agreement before the end of the contract, maintenance and repairs, consumables, and buyouts.