Short on cash, but need equipment? Consider leasing what you need. Leasing equipment may be a better alternative to buying, depending on your situation and needs.
Today, leasing is common practice in business. Over the past two years, equipment leasing has risen approximately 20 percent, according to recent research by the U.S. Small Business Administration (SBA). And 8 out of 10 U.S. businesses lease all or part of their equipment, reports the Equipment Leasing Association.
Leasing is appropriate for just about any business at any stage of development. For start-up businesses with no revenues, smaller leases–those of $100,000 or less–may be better managed on the personal credit of the owners–if they are willing to make the monthly payments.
Comparing Leasing to Buying
When you buy a piece of equipment or vehicle, you usually have to pay for it in full either by using cash or by financing the balance. After you finish paying for it, you own it.
Equipment leasing, on the other hand, is essentially a loan. The lender buys and owns the equipment and then “rents” it to a business at a flat monthly rate for a set number of months. At the end of the lease, the business has several options. It can purchase the equipment for its fair market value (or a fixed or predetermined amount), continue leasing, return it or lease new equipment.
With a lease, you actually only pay for using the equipment. But at the end of the lease period, you could end up owning nothing. So why lease? The answer is simple: By leasing equipment, you leave money in the bank that can be used for other purchases. Since lease payments are usually smaller than regular loan payments, you don’t have to pay out as much each month.
However, keep in mind that a lease is not cancelable like a bank loan or other debt. If you need to get out a standard loan you can sell the equipment and pay off the loan, or even refinance it. With a lease, you generally have to pay off the lease in full. So you have to be sure you make the payments when you enter into a lease.
So what kinds of equipment make the most sense for a small business to lease? According to research by the SBA, the most common items leased are office equipment, computers, and trucks and vehicles.
Benefits of Leasing
Leasing equipment offers a wide range of benefits, from consistency with expenses to increased cash flow. But perhaps the most significant advantage of leasing is the ability to maintain up-to-date equipment. Leasing allows you to easily and affordably add equipment or upgrade to a complete new piece of machinery to meet future needs. This lets you transfer the risk of being caught with obsolete equipment to the leasing company.
Here are some other benefits of leasing:
o Alternative to financing – Leasing is essentially an alternative to traditional financing and can be great for companies not able to obtain business loans.
o 100-percent “financing” – In many cases, leasing requires no down payment. This allows you to “finance” an entire purchase, including software, hardware, consulting, maintenance, freight, installation, and training costs.