A Guide to Understanding Equipment Leasing

For businesses to actively compete and consistently stay on top of their game, it is essential that they have the right tools and equipment. But, not all businesses have the resources to purchase these tools.

 

Buying equipment is expensive, and the maintenance of this equipment is equally expensive. It doesn’t mean that businesses have to put a hold on their operations because they can’t afford to purchase them

 

This is where equipment leasing comes in as a flexible and cost-effective alternative to buying.

 

 

What is Equipment Leasing?

 

Equipment leasing is a type of financing where you get to rent a piece of equipment for some time as opposed to buying it. At the end of the lease, you can choose to buy the equipment, return it, or extend the lease for another term.

 

 

How does equipment leasing work

 

 

If you decide today that you are going to lease a piece of equipment, you will go into a lease agreement with a lessor (the owner of the equipment).

 

In this agreement, you (the lessee) and the lessor will draft a contract that will be binding throughout the lease. This contract will state for how long you will use the equipment, and the amount of money you will pay monthly.

 

During the lease period, you use the equipment as if it were yours, and the lessor cannot take it back until the lease expires. In some cases, both parties can agree to break the lease before the end of the contract.

 

 

Pros of Equipment leasing

 

There are many reasons why businesses choose to lease equipment, including:

 

  • Flexibility: Equipment leasing allows you to upgrade your equipment as needed, without having to make a large purchase.

 

  • Cost-effectiveness: Leasing can be more cost-effective than purchasing, as it allows you to spread the cost of the equipment over some time.

 

  • Improved cash flow: with the flexible payment plans, you now have cash freed up which can be used to cover other expenses.

 

  • No repair costs: If the equipment breaks down, the leasing company is responsible for repairing it.

 

Cons of Equipment Leasing

Equipment leasing has its disadvantages, which include:

 

  • No Ownership: you do not own the equipment and cannot sell or use it as collateral for a loan.

 

  • Limited Upgrade Options: Leasing agreements may limit your ability to upgrade or modify the equipment.

 

  • Penalties: You are subject to penalties if you default on payment or want to cancel the lease contract.

 

  • Long-Term Cost: Over the long term, leasing can be more expensive than purchasing equipment outright.

 

 

Types of equipment lease

There are primarily two types of equipment leasing (operating and finance lease) and they are explained below.

 

  • Operating Lease:

An operating lease is a lease agreement in which you only rent the asset for a specified period and do not take on ownership of the asset. The lessor (the owner of the asset) remains responsible for maintenance, insurance, and any other costs associated with the asset.

 

An operating lease doesn’t affect your balance sheet and is also for a short term, as a longer period would mean more expense on your part.

 

  • Finance Lease:

In a finance or capital lease, the lessor still owns the equipment, but it is recorded as an asset in your books. With this lease, you have the option to purchase the asset at the end of the lease term for a predetermined price. This price is usually very discounted, as the lease period already covers about 75% of the equipment’s lifespan.

 

 

How to get started with equipment leasing

  • Determine your Equipment Needs
  • Research Equipment Leasing Companies
  • Compare Leasing Options (length of the lease term, the monthly payment, and any additional fees or charges).
  • Choose the Right Leasing Company
  • Complete the lease application
  • Sign the lease agreement
  • Begin using the equipment:
  • Make regular payments:
  • Return or purchase the equipment at the end of the lease period

Need to lease a piece of equipment for your company? Contact us now to get it sorted.

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