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:
- 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?
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.
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 It would not be a good idea to use outdated equipment when there is a better version on the way.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.
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?
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.
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.
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