Equipment Leasing

Get the facts on leasing before you sign on the dotted line.

By Mie- Yun Lee

Opinions expressed by Entrepreneur contributors are their own.

Equipment leasing has become an increasingly popular option forcompanies that are looking to acquire new equipment.

In fact, according to the Equipment Leasing Association, as manyas 8 out of 10 U.S. businesses choose to lease at least some or allof their equipment.

A lease lets you pass the buck--at least for a while. A thirdparty funding source (the lessor) will purchase the equipment youwant on your behalf. You (the lessee) can use the equipment inexchange for regular payments made over a contracted period oftime.

This guide is designed to give you the facts you need to leaseequipment for your business. The various sections are listed in thebox above. You can choose to read this guide from beginning to end,or jump directly to a section of interest.

Advantages ofLeasing
One of the greatest advantages of leasing is that it offers fairlyminimal upfront costs. Unlike bank loans that may require asubstantial down payment, two advanced payments are generally allthat are required at the beginning of a lease.

In addition, leasing protects against equipment obsolescence byforcing you to evaluate the useful life of the equipment that youintend to lease and to set lease terms accordingly.

Finally, leasing can lessen the burden that taxes have on yourcompany's wallet. Depending on how your lease is structured,you may be able to fully deduct lease payments as a businessexpense as opposed to depreciating the value of the equipment as ifit were a capital expenditure.

While virtually all lessors will lease tangible equipment, not allare willing to add soft assets to the lease. Examples of"soft" or "intangible" assets include software,warranties, service, training, installation, and shippingcosts.

Why is this? From a lessor's standpoint, it's mucheasier to repossess a computer or copier in the event that youdefault as opposed to software or shipping costs.

You'll want to make sure to inquire early on about yourlessor's policies if soft asset financing is important toyou.

Get free quotes on leasing servicesfrom

Types ofLeases
Although they come disguised under many names, you'll find thatthere are basically two types of leases: finance andtrue.

Finance leases
Also known as capital lease, conditional sale,or dollar buy out, these leases work best if you intend to keep theequipment at the end of the lease. The main advantage of this typeof lease is that it gives you the option to purchase the equipmentfor a nominal fee, usually $1.00. Payment terms on finance leasestend to last close to the expected useful life of theequipment.

True leases
True lease payments (a.k.a. tax-, operating-, orFMV-lease), on the other hand, do not usually span the fullexpected life of the equipment. At the end of the lease, you canchoose to walk away from the equipment or purchase it at fairmarket value. Payments on true leases generally tend to be lowerthan those on finance leases. This is because lessors have theopportunity to resell the equipment when the lease ends.

One of the main benefits of true leases is that you may be able tofully claim lease payments for tax purposes.

In contrast, finance leases are usually regarded by thegovernment as an installment purchase plan in lease clothing. As aresult, although finance leases let you spread your payments overtime, they are not tax advantaged in the way true leases are.

Make sure to discuss the tax implications of your lease with anaccountant before signing any contract.

You can turn to a broker, captive leasing company, orindependent lessor to handle your lease.

A broker acts as the middle-man between you,the lessee, and the funding source (e.g., bank or financialservices company) that agrees to finance the asset.

Captive leasing company
As a subsidiary leasing armof a manufacturer or dealer, a captive leasing company's mainpurpose is to provide leasing to its parent company and/or dealernetworks.

Independent lessor
Independent lessors are fundingsources that lease directly to businesses.

While fixed monthly payments are the norm, they are not your onlyoption. Depending on your company's financial situation, thereare several payment plans that may be more appealing.

If your company's cash flow ebbs or flows depending on theseason, then you might want to consider a skip leaserepayment structure.

Skip leases allow you to skip payments during slow monthswithout being penalized. They are ideal for recreational andagricultural businesses that rely heavily on certain times of theyear for revenue generation.

Step-up leases provide a solution for companies withlimited cash and that are dependent upon the acquisition ofspecific equipment to increase revenue. This type of leaserecognizes that the company will be able to handle increased leasepayments over time.

An alternative to a step-up lease is a 60- or 90- daydeferred lease. Just as its name implies, this lease allows youto defer your first payment for 2 or 3 months. Usually you will nothave to present a down payment with this option.

Ending YourLease
Lease terms range anywhere from 6 to 120 months, although themajority fall between 12 and 60 months.

The lease term that you decide upon will depend heavily on whatyou 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 futureobligation.
  • renew the lease.
  • purchase the equipment for a nominal fee or fixed price agreedupon at the lease inception.
  • purchase the equipment at fair market value.

Now that you've picked out equipment and decided to lease, itstime to get quotes. Two to four quotes can give you a good sensefor what the market is charging.

Before you shop around for quotes, be prepared to provide thefollowing information: The cost of the equipment, thelength of the lease, and whether or not you willpurchase the equipment at the close of the lease.

When shopping around for quotes, it's important to make sureyou are comparing apples to apples. For instance, has the quotebeen calculated based on two advanced payments and a securitydeposit, or on one advanced payment alone?

Even though quotes are not 100% exact (a credit check needs tobe done first to be certain), they are usually pretty accurate. Inthe end, payments may go up or down depending on how good yourcredit turns out to be.

Applying for aLease
While you should feel free to shop around for quotes, don'tcomplete a lease application unless you are absolutely sure thatyou'll lease through them upon being approved.

That's because each credit inquiry shows up on your creditreport, and excessive inquiries damage your chance of beingaccepted or approved for the best credit rating.

After you've submitted your application, an answer won'tbe far out of reach. On average, it takes only 3-48 hours to findout whether you've been accepted.

Lower the purchase price

Since equipment leasing generally involves straight financing,the best way to lower your lease payments is to bring down thepurchase 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 boardand range anywhere from 10-19%, depending on such factors as creditworthiness, the size of the lease, and the area that you live in.You'll find that middle and large ticket leasing tend to bemore 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 ofdollars by cutting out the soft assets.

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