Why equipment leasing

Key takeaway: There are pros and cons for both buying and leasing equipment; the right option for you depends on your business and situation.

A purchase isn't the only alternative to leasing. In fact, it's not even the most common. Loans, lines of credit and factoring services are popular means of financing large equipment as well. Like a purchase, loans provide more ownership of the equipment.

With a lease, the lessor holds the title to any equipment and offers you the option to buy it when the lease concludes. A loan enables you to retain the title to any of the items you purchase, securing the purchase against existing assets. Unfortunately, terms can be the major drawback of a loan.

Unlike a lease, which provides fixed-rate financing, a loan or line of credit's interest rates may fluctuate throughout the loan term. This can make budgeting problematic, depending on the size of the loan. Factoring is another way to purchase costly equipment and is often faster than applying for a loan.

By leveraging your accounts receivable, you can quickly turn outstanding payments into cash by selling these invoices to a factor. Funding is usually available in a matter of days. This makes factoring a popular resource for smaller manufacturing operations, the transportation industry, and businesses that routinely handle contracts with a fast turnaround.

Key takeaway: Alternatives to equipment leasing include financing and factoring. Key takeaway: After submitting an equipment lease application, you'll receive an answer within 48 hours.

Once you sign the contract, it takes up to two days for the funds to be released to you or the vendor. There are two primary types of equipment leases.

The first is known as an operating lease. In short, this structure allows a company to use an asset for a specific period of time without ownership. The lease period is usually shorter than the economic life of the equipment.

At the end of the lease, the lessor can recoup additional costs through resale. Unlike an outright purchase or equipment secured through a standard loan, equipment under an operating lease cannot be listed as capital. It's accounted for as a rental expense. This provides two specific financial advantages:. Average contracts last 12 to 36 months. With the prevalence of leasing, new accounting regulations from the Financial Accounting Standards Board require companies to reveal their lease obligations to avoid the false impression of financial strength.

In fact, all but the shortest-term equipment leases must now be included on balance sheets. While leased equipment does not have to be reported as an asset under an operating lease, it's far from free of accountability. Sometimes known as a finance lease or capital lease, this lease structure is similar to an operating lease in that the lessor owns the equipment purchased.

It differs in that the lease itself is reported as an asset, increasing your company's holdings as well as its liability. Commonly used by large companies, such as major retailers and airlines, this setup provides a unique advantage, as it allows the company to claim both the depreciation tax credit on the equipment and the interest expense associated with the lease itself. In addition, the company may choose to purchase the equipment at the end of a finance lease.

Given the financial edge this provides, the APR for a finance lease is higher, often double that of an operating lease. Average contracts range from 24 to 72 months. Key takeaway: With an operating lease, you have access to the equipment for a time but don't own it. The lease period tends to be shorter than the life of the equipment. With a finance lease, you own the equipment at the end of the term. This type of lease is typically used by big companies. There are additional responsibilities that can result in expenses above and beyond the cost of your monthly lease payment.

These typically include the following items:. Key takeaway: Leases often charge extra fees for insurance, maintenance and repairs, and return of the equipment. Given the costs and considerations addressed in the sections above, it's essential to compare several lease providers to ensure you get the best rate.

Before beginning your search, you should familiarize yourself with the three different types of equipment finance providers and the benefits each provides.

A lease broker serves as an intermediary between you and any prospective lessors. The broker will present you with the offers and submit your requests for financing, handling much of the paperwork for you. Brokers represent only a small segment of the leasing market, and their service does not come cheap.

The benefit of using brokers is realized in their extensive relationships. Often industry-specific, they specialize in obtaining a wider range of equipment, sometimes at a better price than would be available through standard channels. This is often the subsidiary leasing arm of a manufacturer or dealer. Also known as a captive lessor, a leasing company's sole aim is to facilitate leases with its parent company or dealer network.

For this reason, you will usually only deal with a leasing company when working directly with a manufacturer. This type encompasses all third-party lease providers. Independent lessors include banks , lease specialists and diversified financial companies that provide equipment leases directly to a business.

They differ from leasing companies in that they typically specialize in the remarketing of equipment, a skill that enables them to group products from multiple manufacturers and offer more competitive APRs.

Key takeaway: You can work with a lease broker, leasing company or an independent lessor to lease equipment. The best advice for choosing a quality lessor is to examine them with the same level of scrutiny with which you and your business are being scrutinized.

Plan expenses for cash flow and business cycle fluctuations Financing equipment helps maintain cash flow and greater certainty in budgeting by setting customized rent payments to match cash flow and even seasonal cash flows. Keep up to date with new technology Leasing, loans or other financing often enables you to acquire more and better equipment than you could have without financing. Address tax considerations Tax-oriented leases should produce lower rents since the lessor retains title and depreciation.

Leverage equipment expertise The equipment financier can be a valued consultant, providing benefits that range from setting residual rates through lifecycle asset management solutions. Avoid getting stuck with out-of-date equipment When a lessor owns the equipment in a true lease, the lessor bears the risk of the equipment used by a business from becoming obsolete.

Outsource asset management Many financing companies provide asset management services that can track the status of equipment, know when to upgrade or update it, and provide services relating to installation, use, maintenance, de-installation and disposal of the equipment.

Obtain the convenience of product and service bundling Certain financial products allow customers to finance the entire cost of equipment, including installation, up-front maintenance, training and software charges, thereby packaging systems and ancillary products and services into a single, easy-to-manage solution.

Get no-hassle equipment disposal Equipment management by a third party, such as an equipment financing company, should enhance the ability of a business to focus on its core operations.

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He has over 25 years of experience in both sales and account management. Fora Financial News. Industries We Serve. Small Business. Working Capital. Business Finances Small Business Loans. Fora Financial. Post by: Fora Financial Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more.

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