Introduction
Equipment leasing has become an increasingly popular option for
companies that are looking to acquire new equipment.
In fact, according to the Equipment Leasing Association, as many
as 8 out of 10 U.S. businesses choose to lease at least some or all
of their equipment.
A lease lets you pass the buck--at least for a while. A third
party funding source (the lessor) will purchase the equipment you
want on your behalf. You (the lessee) can use the equipment in
exchange for regular payments made over a contracted period of
time.
Content Continues Below
This guide is designed to give you the facts you need to lease
equipment for your business. The various sections are listed in the
box above. You can choose to read this guide from beginning to end,
or jump directly to a section of interest.
Advantages of
Leasing
One of the greatest advantages of leasing is that it offers fairly
minimal upfront costs. Unlike bank loans that may require a
substantial down payment, two advanced payments are generally all
that are required at the beginning of a lease.
In addition, leasing protects against equipment obsolescence by
forcing you to evaluate the useful life of the equipment that you
intend to lease and to set lease terms accordingly.
Finally, leasing can lessen the burden that taxes have on your
company's wallet. Depending on how your lease is structured,
you may be able to fully deduct lease payments as a business
expense as opposed to depreciating the value of the equipment as if
it were a capital expenditure.
What's
Included
While virtually all lessors will lease tangible equipment, not all
are willing to add soft assets to the lease. Examples of
"soft" or "intangible" assets include software,
warranties, service, training, installation, and shipping
costs.
Why is this? From a lessor's standpoint, it's much
easier to repossess a computer or copier in the event that you
default as opposed to software or shipping costs.
You'll want to make sure to inquire early on about your
lessor's policies if soft asset financing is important to
you.
Types of
Leases
Although they come disguised under many names, you'll find that
there are basically two types of leases: finance and
true.
Finance leases Also known as capital lease, conditional sale,
or dollar buy out, these leases work best if you intend to keep the
equipment at the end of the lease. The main advantage of this type
of lease is that it gives you the option to purchase the equipment
for a nominal fee, usually $1.00. Payment terms on finance leases
tend to last close to the expected useful life of the
equipment.
True leases True lease payments (a.k.a. tax-, operating-, or
FMV-lease), on the other hand, do not usually span the full
expected life of the equipment. At the end of the lease, you can
choose to walk away from the equipment or purchase it at fair
market value. Payments on true leases generally tend to be lower
than those on finance leases. This is because lessors have the
opportunity to resell the equipment when the lease ends.
Tax
Implications
One of the main benefits of true leases is that you may be able to
fully claim lease payments for tax purposes.
In contrast, finance leases are usually regarded by the
government as an installment purchase plan in lease clothing. As a
result, although finance leases let you spread your payments over
time, they are not tax advantaged in the way true leases are.
Make sure to discuss the tax implications of your lease with an
accountant before signing any contract.
Leasing
Providers
You can turn to a broker, captive leasing company, or
independent lessor to handle your lease.
Broker
A broker acts as the middle-man between you,
the lessee, and the funding source (e.g., bank or financial
services company) that agrees to finance the asset.
Captive leasing company
As a subsidiary leasing arm
of a manufacturer or dealer, a captive leasing company's main
purpose is to provide leasing to its parent company and/or dealer
networks.
Independent lessor
Independent lessors are funding
sources that lease directly to businesses.
Payment
Options
While fixed monthly payments are the norm, they are not your only
option. Depending on your company's financial situation, there
are several payment plans that may be more appealing.
If your company's cash flow ebbs or flows depending on the
season, then you might want to consider a skip lease
repayment structure.
Skip leases allow you to skip payments during slow months
without being penalized. They are ideal for recreational and
agricultural businesses that rely heavily on certain times of the
year for revenue generation.
Step-up leases provide a solution for companies with
limited cash and that are dependent upon the acquisition of
specific equipment to increase revenue. This type of lease
recognizes that the company will be able to handle increased lease
payments over time.
An alternative to a step-up lease is a 60- or 90- day
deferred lease. Just as its name implies, this lease allows you
to defer your first payment for 2 or 3 months. Usually you will not
have to present a down payment with this option.
Ending Your
Lease
Lease terms range anywhere from 6 to 120 months, although the
majority fall between 12 and 60 months.
The lease term that you decide upon will depend heavily on what
you decide to do with the equipment at the end of your lease.
Usually, you have four choices. You can:
- return the equipment to the lessor with no future
obligation.
- renew the lease.
- purchase the equipment for a nominal fee or fixed price agreed
upon at the lease inception.
- purchase the equipment at fair market value.
Lease
Shopping
Now that you've picked out equipment and decided to lease, its
time to get quotes. Two to four quotes can give you a good sense
for what the market is charging.
Before you shop around for quotes, be prepared to provide the
following information: The cost of the equipment, the
length of the lease, and whether or not you will
purchase the equipment at the close of the lease.
When shopping around for quotes, it's important to make sure
you are comparing apples to apples. For instance, has the quote
been calculated based on two advanced payments and a security
deposit, or on one advanced payment alone?
Even though quotes are not 100% exact (a credit check needs to
be done first to be certain), they are usually pretty accurate. In
the end, payments may go up or down depending on how good your
credit turns out to be.
Applying for a
Lease
While you should feel free to shop around for quotes, don't
complete a lease application unless you are absolutely sure that
you'll lease through them upon being approved.
That's because each credit inquiry shows up on your credit
report, and excessive inquiries damage your chance of being
accepted or approved for the best credit rating.
After you've submitted your application, an answer won't
be far out of reach. On average, it takes only 3-48 hours to find
out whether you've been accepted.
Negotiating
Tips
Lower the purchase price
Since equipment leasing generally involves straight financing,
the best way to lower your lease payments is to bring down the
purchase price of the equipment you intend to lease.
Lower the rate
Another way to lower payments is to negotiate a lower rate.
Rates for small ticket leasing (under $100,000) go across the board
and range anywhere from 10-19%, depending on such factors as credit
worthiness, the size of the lease, and the area that you live in.
You'll find that middle and large ticket leasing tend to be
more competitive at 6-8%. On average, brokers tend to make 3-5%
above the rate given by the funding source.
Drop the soft assets
Lastly, calculate your lease with and without the soft assets.
Although it may be more convenient to pay one bill every month,
you'll probably be able to save hundreds, if not thousands of
dollars by cutting out the soft assets.