There are numerous benefits to leasing, an equipment financing method that has been popular for many years. It provides some very unique benefits over conventional bank financing or an outright purchase, and here are 20 reasons to lease equipment.
1. Pay what you use
The lease highlights the utility value of the equipment. In other words, leasing provides the opportunity to pay for equipment as it generates income for the business. It is no different than paying employees biweekly or monthly rather than paying them in advance for the next 2-3 years of work. Both are assets of the company and it does not make sense to prepay either of them.
2. Payments are fixed
In most cases, the lease payments are fixed over the term. This has a great advantage over conventional bank loans or credit purchases where the interest rate is commonly based on a floating rate. Knowing in advance what the payments will be makes budgeting easier and reduces interest rate risk.
3. Longer terms / lower payments
Many banking institutions will limit the term of a loan to 12 or 24 months, at which point the rate and terms of the loan are renegotiated. Based on the useful life of the equipment being rented, it is not uncommon to see fixed lease terms of up to 48 or 60 months. In effect, this reduces the monthly payment to a fixed rate.
4. Protection against obsolescence
In this age of great technological advancement, certain types of equipment purchased today can become obsolete in a year or two. Most leases offer a provision to economically upgrade equipment within the last year of the lease, giving the business built-in protection against obsolescence. Also, although the leasing company has ownership of the equipment, it will generally allow the supplier to provide a trade-in for the existing equipment.
5. No down payment
Conventional banking institutions will generally require a 10% to 25% down payment in order to finance most equipment. In a lease transaction, the full amount is financed and only the first or first and last payment is required at the time of the start of the lease. In some cases where the financial strength of the business is not sufficient to support the amount being rented, a small down payment may be required.
6.100% financing
Traditional financing methods will often not allow indirect costs such as installation, transportation, maintenance, and software to be included in the loan. These must be paid directly out of working capital. A lease, on the other hand, will allow soft costs to be included, thus conserving working capital and allowing a single monthly payment for the entire acquisition.
7. Quick and easy
Depending on the dollar amount of the acquisition, a traditional loan can take several days and require approvals from higher levels within the financial institution. This can mean delays in ordering much-needed equipment. The credit process for acquiring a lease is generally much faster and can be anywhere from a few hours to a couple of days. Again depending on the size of the acquisition.
8. Creativity and flexibility
Banks are often known for their creativity and flexibility. They are subject to the Banking Law, which limits some of the things they can do to help their customer base. Leasing, on the other hand, has become a financing method that focuses on specific customer requirements. Payments can be structured to accommodate irregular income streams throughout the year or configured to match payback on equipment that has measurable monthly savings. Leasing is the ultimate form of creative financing.
9. Purchase and renewal options
At one point, leases were structured in such a way that the only available purchase option was the fair market value of the equipment determined at the end of the lease term. Over the years, the market has made it clear that they want a better defined purchase price established at the beginning of the lease. As a result, most leasing companies will establish a purchase price at the end of the mutually agreed upon term at the beginning of the lease. This can range from $ 1.00 to 25% and is often reflected in the monthly payment. In addition, the purchase option can be refinanced again under a new lease, usually for a period of 12 to 24 months.
10. Conservation of working capital
In a recent industry survey, the number one reason to lease equipment was the conversation about working capital. By using lease financing, working capital is freed up to be used in the day-to-day operations of the business for things like buying inventory, advertising, trade shows, and hiring employees. Essentially, leasing a business to reduce the amount invested in a depreciating asset and use the money where it will generate a higher return.
11. Simplified forecast
Lease payments appear as an expense on the company’s income statement. Because payments are fixed and predetermined at the beginning of the lease, companies can make smart forecasts and budgets for the future.
12. From capital budgets to operating budgets
Within large organizations, capital acquisitions generally require a higher level of approval than operating expenses and, as a result, take more time. A lease purchase, being a monthly expense, will generally be within an operating budget that allows managers of various departments or business units to approve much-needed equipment acquisitions.
13. Tax benefits
Because lease payments are treated as an expense in the income statement, the payments can generally be canceled. Because each business has unique financial circumstances and accounting firms that differ in the accounting treatment of a lease, it is suggested that the accounting firm be consulted before making a leasing decision based solely on tax advantages.
14. Low interest / no interest programs
From time to time, equipment vendors will offer time-sensitive low- or no-interest marketing programs to help them sell slow-moving inventory. It is wise to watch out for these types of programs or ask the provider if they have rental incentives available.
15. Framework leases
A master lease is simply a document that contains all the terms and conditions of the lease and is signed once and covers all future lease purchases. Generally, a lease line of credit is pre-approved for a dollar amount that will accommodate anticipated purchases over a period of time. As equipment is purchased, a simple one-page document is signed. This saves time and is effective on a major project or expansion.
16. Preserve bank lines of credit
No business wants to operate on the top of its line of credit and is often reluctant to approach the bank to request an increase in the line of credit. It is wise business practice to have funds available for unexpected events – a slow month or quarter, unpaid accounts receivable, or a claim for unexpected damages. The use of leasing creates a new line of credit without any effect on the banking relationship.
17. Hedging against inflation
Leasing allows you to pay in dollars and, in turn, pay those costs incrementally in inflated future dollars, as the equipment is used.
18. Competitive advantage
Staying ahead of the competition often requires the latest and greatest technology. Equipment rental allows you to get work done more efficiently, more effectively, and more economically. In addition, it offers the advantage of continuously updating to the latest technology available at a reasonable cost.
19. Sale and leaseback
A Sale & Leaseback is a specialized leasing transaction in which the leasing company will purchase equipment free of charge, at a fair market price from a company, and lease it back to you. It is a tremendous way to free up capital that is tied up in depreciated assets.
20. Improved corporate image
Fleet vehicles and production equipment have an effect on corporate image. Leasing allows assets to look new, fresh, and create the image of a successful company.
In short, leasing emerged as a means of acquiring equipment and it is not surprising that many equipment manufacturers have established their own leasing branches to help their customers purchase products in the most efficient way. Leasing makes business sense.