There are numerous benefits to leasing, an equipment financing method that has been popular for many years. It offers some unique benefits over conventional bank financing or an outright purchase, and here are 20 reasons to lease equipment.
1. Pay as you go
Leasing highlights the utility value of the equipment. In other words, leasing provides the opportunity to pay for equipment as it generates revenue for the business. It’s no different than paying employees bi-weekly or monthly instead of paying them up front for the next 2-3 years of work. Both are company assets and there is no point in paying either one upfront.
2. Payments are fixed
In most cases, lease payments are fixed for the length of the term. This has a great advantage over conventional bank loans or credit purchases where the interest rate is commonly based on a floating rate. Knowing in advance what the payments will be makes budgeting easier and reduces interest rate risk.
3. Longer terms / Lower payments
Many banking institutions will limit the term of a loan to 12 or 24 months, at which point the rate and terms of the loan are renegotiated. Based on the useful life of the equipment being leased, it is not uncommon to see fixed lease terms of up to 48 or 60 months. In effect, this reduces the monthly payment to a fixed rate.
4. Protection against obsolescence
In this era of great technological advances, certain types of equipment purchased today may be outdated in a year or two. Most leases offer a provision to economically upgrade equipment within the last year of the lease, giving the business built-in obsolescence protection. Also, even though the leasing company has title to the equipment, they will generally allow the seller to provide the existing equipment as part payment.
5. No down payment
Conventional banking institutions will generally require a 10% to 25% down payment to finance most equipment. In a lease transaction, the entire amount is financed and only the first or first and last payments are required at the time of lease commencement. In some cases, where the financial strength of the business is not sufficient to support the amount being leased, a small down payment may be required.
6. 100% Financing
Traditional financing methods often will not allow indirect costs such as installation, freight, maintenance, and software to be included in the loan. These must be paid directly from working capital. A lease, on the other hand, will allow soft costs to be included, thus conserving working capital and allowing for a single monthly payment for the entire acquisition.
7. Quick and easy
Depending on the dollar amount of the purchase, a traditional loan can take several days and require approval from higher levels within the financial institution. This can mean delays in ordering much-needed equipment. The credit process for the acquisition of a lease is generally much faster and can take from a few hours to a couple of days. Again depending on the size of the acquisition.
8. Creativity and flexibility
Banks are often known for their creativity and flexibility. They are bound by Banking Law, which limits some of the things they can do to help their customer base. Leasing, on the other hand, has become a financing method that focuses on specific customer requirements. Payments can be structured to accommodate irregular income streams throughout the year or set up to match a team rebate that has measurable monthly savings. Leasing is the latest form of creative financing.
9. Purchase and renewal options
At one time, leases were structured in such a way that the only purchase option available was the fair market value of the equipment determined at the end of the lease term. Over the years, the market has made it clear that it wants a better defined purchase price at the beginning of the lease. As a result, most leasing companies will set a purchase price at the end of the mutually agreed-upon term at the beginning of the lease. This can range from $1.00 to 25% and is often reflected in the monthly payment. Additionally, the purchase option can be refinanced back under a new lease typically within 12-24 months.
10. Preservation of Working Capital
In a recent industry survey, the number one reason for leasing equipment was the working capital conversation. Through the use of lease financing, working capital is freed up to be used in the daily operation of the business for things like purchasing inventory, advertising, trade shows, and hiring employees. Essentially, leasing allows a business to reduce the amount invested in a depreciating asset and use the money where it will yield the highest return.
11. Simplified forecast
Lease payments appear as an expense on the company’s income statement. Because payments are fixed and predetermined at the beginning of the lease, businesses can intelligently forecast and budget for the future.
12. Capital Budgets to Operating Budgets
Within large organizations, capital acquisitions typically require a higher level of approval than operating expenses and, as a result, take more time. A lease purchase, being a monthly expense, will typically be included in an operating budget that allows managers of various departments or business units to approve much-needed equipment purchases.
13. Tax Benefits
Because lease payments are treated as an expense on the income statement, the payments can generally be written off. Because each business has unique financial circumstances and accounting firms that differ in the accounting treatment of a lease, it is suggested that the accounting firm be consulted before making a decision to lease solely on the basis of tax advantages.
14. Low Interest/No Interest Programs
From time to time, equipment vendors will offer low- or no-interest time-sensitive marketing programs to help them sell slow-moving inventory. It’s wise to keep an eye out for these types of programs or ask the provider if they have any leasing incentives available.
15. Master Lease Agreements
A master lease is simply a document that contains all the terms and conditions of the lease and is signed once and covers all future lease purchases. Typically, a lease line of credit is pre-approved for a dollar amount that will accommodate anticipated purchases over a period of time. As equipment is purchased, a simple one-page document is signed. This saves time and is effective on an expansion or a large project.
16. Preserve bank lines of credit
No business wants to be operating at the top of their credit line, and they are often reluctant to approach the bank for a credit line increase. It is prudent business practice to have funds available for unexpected events: a slow month or quarter, unpaid accounts receivable, or an unexpected damage claim. The use of leasing creates a new line of credit without any effect on the banking relationship.
17. Hedge against inflation
Leasing allows payment in dollars and, in turn, paying those costs incrementally in inflated future dollars, as the equipment is used.
18. Competitive advantage
Staying ahead of the competition often requires the latest and greatest technology. Equipment rental allows you to get the job done more efficiently, more effectively, and more economically. In addition, it offers the advantage of continually updating to the latest technology available at a reasonable cost.
19. Sale and leaseback
A sale and leaseback is a specialized leasing transaction in which the leasing company will purchase equipment free of liens, at a fair market price from a company, and lease it back to you. It’s a great way to free up capital that’s tied up in depreciated assets.
20. Improved Corporate Image
The vehicles in the fleet and the production equipment all have an effect on the corporate image. Leasing allows assets to look new, fresh and creates the image of a successful business.
In short, leasing emerged as a means of purchasing equipment and it is no wonder that many equipment manufacturers have established their own leasing arms to help their customers purchase products in the most efficient manner. Leasing just makes good business sense.