Many new business owners are surprised by the expenses they encounter during the startup and expansion phases of their companies, and many search for ways to reduce these expenses. One way you can reduce your expenses is through equipment leasing. These are a few things you should know.
Leasing Explained
An equipment lease is like a rental agreement. You agree to pay a rental fee to machinery vendors so that you can temporarily use their equipment. You typically have to agree to additional terms, such as the amount of usage, maintenance requirements and condition at the end of the lease.
Instead of working with a bank or other financing company, you work directly with the vendor to determine the details of the lease. This allows even new businesses or those that have credit challenges the opportunity to gain the use of equipment. Your payments can be negotiated so they are due monthly, seasonally, yearly, etc.
At the end of your lease, you can choose to purchase or return your equipment. You can also choose to upgrade and sign a new lease.
Disadvantages of Leasing Your Equipment
You should be aware of a few disadvantages to equipment leasing. First, these assets are not yours, so they cannot be used as collateral, and they are rarely seen on your balance sheet, unless you choose to purchase it at the end of the lease and choose a capital lease, which is more expensive. In addition, if you choose not to purchase the assets at the end of the lease, you have no machinery to do the job. You either have to get into another lease or purchase new equipment.
Most leasing companies also require a specific leasing period or other terms. For example, you may be required to upgrade, maintain or otherwise service the machinery at your cost. Also, this equipment is not considered a company asset.
Advantages of Leasing Your Equipment
First, your upfront costs tend to be lower when you lease versus buy machinery. You don’t typically have large down payments, and your assets aren’t tied up as collateral. Lease payments also tend to be lower and have fixed interest rates. In addition, you gain tax incentives or credits that are not available on purchased assets.
You also have opportunities to regularly upgrade your machinery. Also, you can try the equipment before you purchase it.
As a business owner, you should weigh your asset needs now and in the future. Consider the benefits of equipment leasing versus buying as you make your decision.