How Can I Lease Equipment?
Business is different today. Financial decision-makers need flexibility, convenience and control – all valuable characteristics of leasing. Equipment leasing is an established and proven financing vehicle. Yet, many businesses are newly discovering leasing. Choosing to lease is a smart way to acquire equipment.
Three ways exist for leasing equipment, so you can choose the one that best suits your company’s needs:
- A lessee can select and order the equipment and then seek financing through a lessor.
- A lessee can select the equipment by working with a vendor or a manufacturer that offers leasing through its own subsidiary.
- A lessee can obtain the equipment directly through a lessor.
What Types of Companies Lease?
Businesses that lease – called lessees – vary widely from small, one-person operations to Fortune 100 corporations, and the kinds of equipment being leased are just as diverse. Transactions range from a few thousand dollars worth of equipment (such as fax machines) to multi-million dollar cogeneration facilities, telecommunications systems, medical equipment (including CAT scanners and MRI imaging), office systems, computers, commercial airliners, and transportation fleets.
Evaluate Your Financing Options
A lease is a financing agreement for use of equipment. A lease is structured to meet your organization’s special needs. To decide if leasing is the best option in your case, you must first understand those needs and ask yourself these questions:
- How does this equipment make your business more competitive?
- What is the most efficient use of your cash flow to pay for this equipment?
- How long will you use the equipment?
- What will your equipment needs be in the future?
Obviously, you will want to factor the cost of leasing into your evaluation. Generally, the cost of leasing is comparable to those of other financing options when looking at the whole transaction. It is important to point out that leases are not loans. As a result, their costs are figured differently from those of loans. Leases take into account that the equipment is worth something at the end of the lease term. This is called its residual. Residuals are built into lease pricing, usually making the lease payments lower than a loan. To compare lease products, it is better to compare monthly payments than to try to compare loan interest rates with lease rates. On a cost-of-capital basis, leasing may be the least expensive option.
Leasing companies can offer competitive rates for a number of reasons. Lessors – with their volume purchasing power – can secure attractive financing deals and pass along the savings to the lessee. The lessor also is better able to take advantage of the deduction for depreciation expense that comes with ownership.
Once you’ve completed your evaluation and decided to lease your next equipment acquisition, the first step is to select the type of lease that fits your needs. There are several different types of leases. You and your lessor should consider these factors in determining which is best for you.
- How long you want to use the equipment
- What you intend to do with the equipment at the end of your lease
- Your tax situation
- Your cash flow
- Your company’s specific needs as they relate to future growth.
You also will need to determine what happens at the end of the lease. Your options can include returning the equipment to the lessor, purchasing the equipment at fair market value or a nominal fixed price, or renewing your lease.