When and How to Lease Equipment
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 starting a one-person business and need just 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 you require a dozen computers, you may want to look into leasing.
According to the Equipment Leasing and Finance Association(ELFA), approximately 80 percent of U.S. companies lease some or all of their equipment, and there are thousands of equipment-leasing firms nationwide catering to that demand.
"[Leasing is] an excellent hedge against obsolescence," explains a spokesperson at the ELFA, "especially if you're leasing something like computer equipment and want to update it constantly."
Other leasing advantages include: making lower monthly payments than you would have with a loan, getting a fixed financing rate instead of a floating one, 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.
Leasing also has its downside, however: You'll 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.
As you put together an equipment leasing package, consider these issues:
- What equipment do you need and for how long?
- Do you want to bundle service, supplies, training and the equipment lease itself into one contract?
- Have you anticipated your company's future needs so you can acquire adequate equipment?
- What is the total payment cost?
Also ask the following questions about each leasing source you investigate:
- Who will you be dealing with? Is there a separate company financing the lease? (This may not be desirable.)
- How long has the company been in business? As a general rule, deal only with financing sources that have been operating at least as many years as the term of your proposed lease.
- Do you understand the terms and conditions during and at the end of the lease?
- Is casualty insurance (required to cover damage to the equipment) included?
- Who pays the personal property tax?
- What are the options regarding upgrading and trading in equipment before the lease period expired?
- Who is responsible for repairs?
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's the lease costing you? What are your immediate and long-term 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 startups tend to have little or no credit history, leasing equipment is often difficult or even impossible. However, some companies will consider your person, rather than business, credit history during the approval process.
Corrections & Amplifications: An earlier version of this article referred to the Equipment Leasing and Finance Association by its previous name, the Equipment Leasing Association of America. The name had changed in 2006.