The Fundamentals of Leasing Business Equipment
What it is: From computers and heavy machinery to complete offices, it is possible to lease almost anything for your business. Equipment leasing can provide a lifeline for cash-strapped businesses in need of the tools of the trade.
How to get it: Equipment leasing is basically a loan in which the lender buys and owns equipment and then "rents" it to a business at a flat monthly rate for a specified number of months. At the end of the lease, the business may purchase the equipment for its fair market value (or a fixed or predetermined amount), continue leasing, lease new equipment or return it.
Upside: Advantages include getting your hands on needed equipment without paying the costs up front. Lines of credit stay freed up because the leases are not bank loans, and lease payments can potentially be deducted as a business expense. It is also possible to easily upgrade equipment once a lease expires.
Downside: Leasing can be an appropriate for any business at any stage of development. But when it comes to startup businesses, it is likely the owner will be obliged to put his or her personal credit on the line in order to secure the lease.
Related: When and How to Lease Equipment
Other downsides include a higher price over the long term, and the lease commits you to keep the equipment for a period of time.
Still, the Equipment Leasing and Finance Association estimates that four-fifths of businesses at least lease some of their equipment -- a testament to the usefulness of the practice.
A company selling equipment is often able to make a direct referral to a leasing company with which it does business.
It is a good idea to get a quote from the leasing firm referred by the company that wants to sell you the equipment. The quote should be competitive. After all, the company selling products wants to sell as many as possible, and it surely doesn't win any points by referring a leasing company that gouges its customers. But it also pays to get another quote. Usually, the company selling the equipment works with more than one leasing company. Or ask a friend or a business associate for a referral.
Keep in mind that the person making the leasing agreement may be a broker and not be the source of the equipment.
A good rule of thumb is to deal only with financing sources that have operated at least as long as the term of the proposed lease. Get picky when it comes to the terms, especially when it comes to casualty insurance to cover equipment damage and responsibility when it comes to paying personal property tax or handling repairs.