Definition: Obtaining the use of machinery, vehicles or other equipment on a
rental basis. This avoids the need to invest capital in equipment.
Ownership rests in the hands of the financial institution or
leasing company, while the business has the actual use of it.
Another way to keep equipment costs down is to lease instead of
buy. These days, just about anything can be leased--from computers
and heavy machinery to complete offices. The kind of business
you're in and the type of equipment you're considering are major
factors in determining whether to lease or buy. If you're just
starting out and only need one computer, for instance, it probably
makes more sense to buy. On the other hand, if you're opening an
office that will have several employees and require a dozen
computers, you may want to look into leasing.
According to the Equipment Leasing Association of America,
approximately 80 percent of U.S. companies lease some or all of
their equipment, and there are some thousands of equipment-leasing
firms nationwide catering to that demand.
Leasing advantages include: making lower monthly payments than
you'd have with a loan, getting a fixed financing rate instead of a
floating rate, benefiting from tax advantages, conserving working
capital and avoiding cash-devouring down payments, and gaining
immediate access to the most up-to-date business tools. The
equipment also shows up on your income statement as a lease expense
rather than a purchase. If you purchase it, your balance sheet
becomes less liquid.
Leasing also has its downside, however: You may pay a higher
price over the long term. Another drawback is that leasing commits
you to retaining a piece of equipment for a certain time period,
which can be problematic if your business is in flux.
Every lease decision is unique, so it's important to study the
lease agreement carefully. Compare the costs of leasing to the
current interest rate, examining the terms to see if they're
favorable. What is the lease costing you? What are your savings?
Compare those numbers to the cost of purchasing the same piece of
equipment, and you'll quickly see which is the more profitable
route.
Because they tend to have little or no credit history, startups
often find it difficult or even impossible to lease equipment.
However, some companies will consider your personal rather than
business credit history during the approval process.
If you decide to lease, make sure you get a closed-end lease
without a balloon payment at the end. With a closed-end lease,
nothing is owed when the lease period ends. When the lease period
terminates, you just turn the equipment in and walk away. With an
open-end lease, it's not that simple. If you turn in the equipment
at the end of the lease and it's worth less than the value
established in the contract, you're responsible for paying the
difference. If you do consider an open-end lease, make sure you're
not open to additional charges such as wear and tear.
Finally, balloon payments require you to make small monthly
payments with a large payment (the balloon) at the end. While this
allows you to conserve your cash flow as you're making those
monthly payments, the bad news is, the final balloon payment may be
more than the equipment is worth.
There are many different avenues through which you can secure an
equipment lease:
- Banks and bank-affiliated firms that will finance an
equipment lease may be difficult to locate, but once found, banks
may offer some distinct advantages, including lower costs and
better customer service. Find out whether the bank will keep and
service the lease transaction after it's set up.
- Equipment dealers and distributors can help you arrange
financing using an independent leasing company.
- Independent leasing companies can vary in size and
scope, offering many financing options.
- Captive leasing companies are subsidiaries of equipment
manufacturers or other firms.
- Broker/packagers represent a small percentage of the
leasing market. Much like mortgage or real estate brokers, these
people charge a fee to act as an intermediary between lessors and
lessees.
For more information on leasing, contact either the Equipment Leasing
Association or the Business Technology Association. The Leasing
Sourcebook, published by Bibliotechnology Systems and Publishing
Co., is a directory of companies that lease equipment. You can also
check your local Yellow Pages for leasing companies.