Compare the pros and cons of business equipment leasing, including capital preservation, tax treatment, flexibility, and risk management in changing markets. Review lease types, costs, ownership limits, and access challenges to decide if leasing fits your company’s growth strategy.
By Brad Nakase, Attorney
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If your business is growing, you may find that you need additional equipment at some point. There are times when the equipment you have on hand is just not enough, whether you’re bringing a new product line to market, offering a new service, or simply seeing an increase in demand.
Equipment leasing may be an option for you if you require more equipment but lack the funds to buy it all at once. Continue reading to find out if equipment leasing plans will be a good fit for your company.
Important Lessons
While there are many methods for companies to buy equipment, in a volatile environment, some may be better than others. Because leasing provides a means of capital preservation, the current rate volatility may tip the scales in favor of leasing.
Leasing equipment can reduce some of the risks involved with capital expenditures, offer flexibility, and enable speedier adaptability to innovations and changes in the market. It’s the right approach, especially for investments where the speed of innovation requires flexibility.
Businesses can choose from two main types of leases: capital and operating.
The kind of lease you sign will be determined by the business you deal with, what machinery you require, and the length of the lease.
A capital lease might be a preferable option, for instance, if an enormous piece of equipment is too costly to buy outright but your company can afford to operate and insure it. For equipment that ages quickly, an operating lease seems more appropriate.
Must Read: How Does an NNN Lease Differ from a Gross Lease?
Let’s look at the equipment leasing benefits over buying in light of the changing economy and the pressing need for companies to maintain financial stability while seeking opportunities for growth.
1. Preservation of Capital
Businesses can obtain the equipment they require through leasing without having to make the large upfront financial commitment necessary for purchase.
Businesses can save money by leasing in five different ways:
When rates are unknown, financial budgeting and planning may be more appealing. Payment certainty could help with these tasks. Additionally, a company’s credit line is not as restricted by leasing as it is by loans, allowing it to borrow money for other purposes.
2. Considerations for the machinery depreciation bonus
Many businesses select a loan over a lease because of the benefit that comes with purchasing equipment. Market swings and legislative modifications, however, have the potential to lessen this incentive, which would lessen the immediate tax benefits it offers. Additionally, there are restrictions on how much depreciation a company can claim annually.
Companies can benefit from tax advantages and retain the machinery on their books with certain lease forms, such as capital leases. However, if that is undesirable for the reasons listed above, there are other advantageous choices.
In these circumstances, equipment leasing benefits are immense:
Companies contemplating a lease for flexibility or off-balance-sheet financing are advised to consult with their tax advisors & accounting personnel to evaluate these factors and understand the tax ramifications of their lease transaction or transactions.
3. The equipment leasing benefits of risk mitigation
Leasing is also used by businesses to manage risk since it can provide a hedge against the hazards of investing in fixed assets in fields that depreciate quickly, such as IT, medical technology, manufacturing, energy equipment, and others.
Lessees can prevent obsolescence by leasing rather than buying the equipment. The freedom to buy, extend, or surrender the equipment at the end of the lease is one advantage of leasing.
Leasing might also offer protection against interest rate and market volatility as a hedge. Fixed lease payments remove the unpredictability of variable-rate financing, enabling companies to more accurately forecast and manage their cash flow.
4. Employing the leasing route to compete successfully in the market
Given the rapid advancements in digital technology, strategic equipment leasing benefits may provide a competitive edge.
Leasing enables businesses to stay current with the latest technology without the financial strain of purchasing equipment or the cost of retaining obsolete equipment on their books.
The world machinery & industrial automation industry size is forecast to increase from $185B (2022) to $407B by 2032.
Fast advancements in robots, artificial intelligence, and the Internet of Things — which are increasingly being leveraged to boost productivity and scale operations — are partly to blame for this increase.
When they choose to rent equipment in these areas, businesses can also potentially better handle changes in the market and in technology. Businesses can successfully plan for interest rates by partnering with a bank and monitoring predictions for rates and market conditions.
5. Equipment leasing benefits in the face of rate uncertainty
Unquestionably, organizations looking to grow or upgrade their skills face difficulties due to economic instability. Leasing becomes an appealing option for businesses due to its ability to preserve capital flow, provide flexibility, reduce risks, and give them a competitive advantage.
1. The equipment is not owned by the business owner
Some advantages, such as tax credits, are associated with equipment ownership. A business owner might not be able to receive these perks if they lease their equipment. Additionally, a business owner’s account books do not reflect the asset’s value when they opt to lease rather than purchase equipment.
Naturally, this may be advantageous. But it can also turn off prospective investors or lenders who could view the lease as a problem.
2. Interest Must Be Paid by the Company Owner
The owner of the company will probably still be required to pay interest during the lease time, even though leasing equipment isn’t the same as an equipment loan. Although average equipment lease interest rates vary, they will typically be around 5% APR.
A business owner may be able to avoid paying interest if they purchase the equipment up front. The owner will have to pay for repairs and other maintenance expenses, though, and the business’s cash flow will be disrupted.
The costs associated with buying equipment may make paying the interest associated with a lease more affordable. This will, however, rely on how financially stable a company is at the moment. It is recommended that a business owner weigh the costs of a loan and a lease before deciding on one.
It could be challenging for entrepreneurs who are starting new companies to obtain this kind of lease. Even for people with a strong financial record and outstanding credit history, this is typically the case. A freshly established company owner who has to lease equipment might need to shell out more up front or make additional concessions for the lender if they want to close the contract.
It might not be worthwhile to pursue an equipment lease as a result. When looking for equipment financing alternatives, a business owner should wait till the business has been operating for a while, if at all possible.
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