It has become increasingly more common in recent years for companies to lease equipment.
Each leasing agreement needs to be read through carefully to understand the terms
and conditions within said lease.
Typically a lease can run anywhere from one to five years. Most equipment
necessary in commercial businesses today, including technical equipment, can be
leased. Some leases provide an option to then purchase the equipment at substantially
less money when at the end of the term of the lease. By leasing equipment,
if structured properly, you can maintain your credit availability, as the lease
debt does not have to be considered a direct liability on your financial statements.
This is advantageous, as it does not limit your ability to borrow from lending sources.
Advantages of lease financing:
* It offers fixed rate financing; you pay at the same
rate monthly.
* Leasing is inflation friendly. As the costs go up over
five years, you still pay the same rate as when you began the lease, therefore making
your dollar stretch farther. (In addition, the lease is not connected to the success
of the business. Therefore, no matter how well the business does, the lease
rate never changes.)
* There is less upfront cash outlay; you do not need to make large
cash payments for the purchase of needed equipment.
* Leasing better utilizes equipment; you lease and pay for equipment only for the
time you need it.
* There is typically an option to buy equipment at end of lease term.
* You can keep upgrading; as new equipment becomes available you can upgrade to
the latest models each time your lease ends.
* Typically, it is easier to obtain lease financing than loans from commercial lenders.
* It offers potential tax benefits depending on how the lease is structured.
One of the reasons for the popularity of leasing is the steady stream of new and
improved technology. By the end of a calendar year, much of your technology
will be deemed "dinosaurs." The cost of continually buying new equipment to
meet changing and growing business needs can be difficult for most small businesses.
For this reason leasing is very advantageous.
Leasing can also help you enhance your status to the lending community by improving
your debt-to-equity and earnings-to-fixed assets ratios. There are a variety
of ways in which a lease can be structured. This provides greater flexibility
so that the lease is structured to best accommodate the individual cash flow requirements
of a specific business. For example, you may have balloon payments, step up
or step down payments, deferred payments or even seasonal payments.