Business Equipment Leasing Pros and Cons

One advantage of equipment leasing is that you don’t need to come up with all the cash to buy the equipment. One disadvantage of equipment leasing is higher overall costs than outright purchasing the equipment.

Author: Brad Nakase, Attorney

Email  |  Call (888) 600-8654

Business Equipment Lease Example

Gregory is the owner of a new Italian restaurant that serves world class pizzas, pastas, and salads. While Gregory is ready to start serving his classic recipes, he first needs to buy kitchen equipment. Unfortunately, much of this equipment is expensive. For example, Gregory needs to buy a fancy pizza oven and stovetops for his chefs. Knowing that he cannot offer sub-par equipment, Gregory must find some way of paying for the machinery without breaking the bank. He decides to look into equipment leasing, which would allow him to rent the equipment he needs, paying a set amount each month. Gregory researches the pro and cons of equipment leasing before making a decision.

What Is Equipment Leasing?

Purchasing equipment for a company can be one of a business owner’s biggest expense, depending on his or her industry. According to ShopKeep, the typical restaurant spends over $100,000 for bar and kitchen equipment, while it forks out another $40,000 on furniture and tables. Almost every industry, in fact, requires equipment to operate properly. The following industries require significant equipment investments:

  • Restaurants
  • Construction companies
  • Office-based businesses
  • Medical firms
  • Manufacturing companies

While equipment is a necessary expenditure, it does not mean that a business owner can always easily afford it. Many businesses, in fact, struggle to purchase the equipment they need to operate without some form of financial assistance. Because of this, many business owners look to equipment leasing companies so that they can get the machinery and appliances they need to operate.

Equipment leasing is a popular funding option among business owners because it can help an individual ease the strain on resources that comes with big, one-time purchases. That said, business equipment leasing is not for everyone, as it comes with risks like any other funding option.

What Are the Advantages of Equipment Leasing?

  1. Less Upfront Cost for Purchases

One of the best benefits of equipment leasing is that it allows a business owner to spread out the cost of the purchase. A lease program, unlike purchasing the product, means that a business owner pays monthly installments to the leasing company in order to use the equipment. The total cost is generally less than one would have paid to own the equipment. Also, the lease payments are made over a long period of time, making them financially manageable.

The flexible payment option means that equipment leases are an attractive funding option for many business owners, especially those who cannot afford to pay for equipment all at once.

  1. Easy to Upgrade to Better Models

Leasing equipment means that it is much easier to upgrade machinery to better models. This is especially the case if a business owner is careful about how he or she structures their rental agreement. For instance, perhaps a business owner needs a certain kind of medical equipment for a doctor’s office, but he knows that a better model will be available in two years. It would not be a good idea to use outdated equipment when there is a better version on the way. Luckily, this business owner could sign a leasing agreement for two years, then trade in the old equipment to upgrade to the new version at the end of the lease. Also, because the business owner does not own the outdated equipment, he does not have to worry about selling it.

  1. More Flexibility Compared to Other Financing Options

Equipment leases are very helpful when it comes to buying a piece of equipment that the owner is not convinced he or she will need long term. For example, a business owner may require a certain piece of machinery for a project lasting two years, but beyond that he or she will not need its services.

Traditional equipment financing, or buying the equipment upfront, means that a business owner is stuck with the machinery regardless of how long he or she requires it. But with most types of equipment lease financing, a business owner will have the ability to get rid of any equipment that is no longer needed at the end of the lease term.

What Are the Negatives of Equipment Leasing?

  1. The Business Owner Does Not Own the Equipment

There are certain benefits that come with owning equipment, such as tax credits. If a business owner leases his or her equipment, they may not be eligible for these benefits. Also, when a business owner chooses to lease equipment rather than buy it, the value of the asset is not present on their account books.

This can, of course, be a good thing. However, it can also scare off other lenders or investors who may see the lease as a potential liability.

  1. The Business Owner Must Pay Interest

Though leasing equipment is not the same thing as an equipment loan, a business owner will likely still need to make interest payments over the course of the lease period. The typical interest rates for equipment leases vary, but in general, the amount will be approximately 5% APR.

If a business owner buys the equipment upfront, then he or she may avoid paying interest. However, there will be a disruption to the company’s cash flow, and the owner will need to cover repairs and other costs associated with maintenance.

Because of the expenses that are tied to purchasing equipment, it may be less expensive to pay the interest that comes with a lease. That said, this will depend on a business’ current financial health. Prior to committing to a loan or a lease, a business owner would be advised to compare the costs of both choices.

  1. Limited Accessibility for New Business Owners

For those business owners who run new businesses, it may be difficult to get this type of lease. This is true in most cases, even for individuals with a good credit history and solid financial record. If a new business owner requires an equipment lease, then he or she may have to pay more upfront or otherwise offer various concessions to the lender to get the deal completed. Because of this, it may not be worth pursuing an equipment lease. If a business owner can afford to, he or she should wait until the company has been in operation for a period of time, and only then look for equipment financing options.

When is Equipment Leasing the Right Choice for a Business?

The value of an equipment lease will depend on the terms the lender offers, but the most important factor is the financial health of one’s company. For instance, a business may have good cash flow, but if the equipment it needs will be outdated within a year, then a lease may be the most sensible option.

Also, if a lease is more expensive, then spreading out the cost of the purchase may offer flexibility for the company going forward.

Obviously, there are many factors that go into this decision. This is why it would be a good idea to discuss one’s options with a financial advisor, who can help a business owner make a wise financial decision. By studying one’s business and considering the above pros and cons, a business owner can make the right choice for his or her business.

Remember, also, that there are other working capital resources available to business owners in need of equipment. These options include the following:

  • Small business loans
  • Lines of credit
  • Business credit cards
  • Cash advances
  • Inventory loans

Please tell us your story:

1 + 0 = ?

See all blogs: Business | Corporate | Employment

Material Breach of Contract

A material breach of contract occurs when a party fail to perform a contract's terms making the primary purpose of the contract not met, the breach is considered material.

What Type of Business Is a Partnership?

A partnership is the simplest business structure where two or more people are owners of a business. The types of business partnerships include general partnership, limited partnership, and limited liability partnership.

What Is Company Culture?

A company culture is how things get done in the workplace. Company culture can more be described as core values or operating principles used to set the tone for the company's overall operations and success.

What is a sole proprietorship?

A sole proprietor is someone who owns an unincorporated business by himself or herself. A sole proprietorship is a business that can be owned and controlled by an individual.

Sole Proprietorship vs. LLC

Sole proprietorships are popular for self-employed professionals, freelancers, and contract workers, while LLC offers personal liability protection than sole proprietorship.

Is it legal to sell homemade food in California?

Yes, you can sell food from home so long as you have California-required health and food handling permits and business licenses. You must get a permit to sell food from home from the county health department in California. 

How to Incorporate a Small Business in California?

To incorporate a small business in California, file an Articles of Incorporation with the California Secretary of State's office. After you file the Article of Incorporation, create corporate bylaws, and elect your initial director(s).

6 Steps for Planning a Business Grand Opening

1. Create Goals for the Event, 2. Begin Planning Early, 3. Stick to the Budget, 4. Have the Right Insurance, 5. Advertise Before the Event, 6. Offer Food and Entertainment

10 Facts About Business Before Starting A Business

1) More than 50% of new businesses survive their first year in business. 2) Less than 50% of family-owned businesses are passed to their children. 3) 40% of business experience challenges in the supply chain…

S Corp vs C Corp – Differences and Benefits

The main difference between an S Corp and a C Corp is that for a C Corp, the corporate profit is taxed to the company, and the dividends to the shareholders are also taxed. In contrast, for an S Corp, the profit is taxed to the shareholder but not to the corporation. Generally, small businesses are S Corps, and major companies are C Corps, e.g., Apple, Microsoft, Caterpillar, John Deer, etc.

How to Form a Corporation in California?

To form a corporation in California follow these steps: 1) Write a one page Article of Incorporation, 2) File the Article of Incorporation with the California Secretary of State, 3) Elect corporate board of directors, 4) File Statement of Information with Secretary of State.

What are the benefits of a corporate lawyer?

The are many benefits of hiring a corporate lawyer for your business which includes: avoiding litigation, enforceable contracts, develop employee policies, proper licensing, etc.

What is Commercial Litigation?

Commercial litigation refers to litigation (lawsuit) that involves commercial or business disputes in court between two or more parties.

How to Get Rid of a 50 50 Business Partner.

How to Get Rid of a 50/50 Business Partner. One method to get rid of a 50/50 partner is to file a business partnership dissolution in the state your company was formed to end the partnership.

Personal Assistant Scam

A personal assistant scam typically involves a perpetrator putting out an ad to hire a personal assistant. Then, when the perpetrator purportedly hires the personal assistant, the assistant is asked to buy something with their own money with the promise to be repaid. The perpetuator then disappears after receiving the goods.

Fiduciary Responsibility Definition

A fiduciary responsibility refers to an organization that must put another person’s best interest first. A fiduciary duty is the highest standard of care in law. For example, a lawyer owes a fiduciary responsibility to the clients, a doctor owes a fiduciary duty to a patient, and a trustee owes a fiduciary duty to a beneficiary.

What is profit formula and how to calculate profit formula?

A business profit is revenue minus expenses. The profit formula in accounting calculates the net gains or losses incurred by the business for a period by subtracting the total expenses from the total income: Total Income – Total Expenses - Profit

What is invoice reconciliation?

Invoice reconciliation is the process of matching bank statements to incoming and outgoing invoices. The purpose of invoice reconciliation is to confirm that the data entry is correctly matched with every invoice.

What Makes a Verbal Contract Valid

A verbal contract is valid when contractual elements are satisfied, such as evidence of an offer, acceptance of the offer, and consideration which is an exchange of value between the parties.

Marketing Transport Company

The easiest way of growing your list of clients is to schedule a meeting with businesses that do a lot of shipping and introduce your transportation company. Then, engage an internet presence to market your transportation business.

What Can You Do with a Toxic Business Partner?

A bad partnership could lead to profit loss and toxic company culture. The first way of dealing with a toxic business partner is to schedule a meeting to discuss your concerns calmly.

Disruptive Business Model

Disruptive business models are disruptive innovations that bring new business ideas or technology to existing markets. A disruptive business does not fit the profile of a standard business model. Amazon is considered as one of the world's most disruptive companies.

How to Get a Business Loan with Bad Credit

For small business owners with bad credit, the easiest place to get a business loan is with the SBA. Although not easy, entrepreneurs with bad credit can get a small business loan.

How to Get a Small Business Grant

You can get a small business grant from the Small Business Administration. Also, check your local government for small business stimulus grants.

Pros and Cons of Etsy

Etsy Pro: Your products are given a large audience, and you easily sell your merchandise. Etsy Cons: You can only sell handmade or vintage merchandise, and there are many competitors.

What is a Breach of Contract in California?

A breach of contract in California arose when a party to a contract failed to achieve a legal duty the contract created. When a party to a contract fails to fulfill the terms of a binding contract, they are liable for damages for breaching the contract.

Business Equipment Leasing Pros and Cons

One advantage of equipment leasing is that you don’t need to come up with all the cash to buy the equipment. One disadvantage of equipment leasing is higher overall costs than outright purchasing the equipment.

LLC vs DBA

The main difference between an LLC and a DBA is that an LLC is a business entity, and a DBA is a registered fictitious business name. Sole proprietors, general partnerships, and LLC can register for a DBA.

See all blog: Business | Corporate | Employment

© Copyright | Nakase Law Firm (2019)