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20 Reasons To Lease Equipment
There are numerous advantages to leasing, a method of financing equipment that has been popular for years. It offers some very unique advantages over traditional bank financing or outright purchase, and here are 20 reasons to lease equipment.
1. Pay as you use
Leasing highlights the utility value of the equipment. In other words, leasing provides an opportunity to pay for the equipment because it is generating revenue for the company. Pre-paying employees for the next 2 or 3 years of work is no different than paying them bi-weekly or monthly. Both are company assets and there is no point in pre-paying for either.
2. Payments are fixed
In most cases, lease payments are fixed for a fixed term. This is a major advantage over buying on a traditional bank loan or credit where interest rates are usually based on a floating rate. Knowing in advance what the payments will be, makes budgeting easier and reduces interest rate risk.
3. Longer terms / lower payments
Many banking institutions will limit the loan term to 12 or 24 months, at which point the loan rates and terms are renegotiated. It is not uncommon to see lease terms of up to 48 or 60 months, depending on the useful life of the equipment being leased. This reduces the monthly payment at a fixed rate.
4. Obsolescence Protection
In this age of great technological advancements, certain types of equipment purchased today may become obsolete within a year or two. Most leases provide for a financial upgrade of the equipment during the last year of the lease agreement which provides the company with obsolescence protection. Additionally, even if the leasing company owns the title to the equipment, it will usually allow the seller to provide a trade-in on the existing equipment.
5. No down payment
Traditional banking institutions require a 10%-25% down payment to finance most equipment. In a lease transaction, the entire amount is financed with the first or first and last payment required at the inception of the lease. In some cases where the company’s financial strength is not sufficient to justify the amount being leased, a small down payment may be required.
6. 100% financing
Traditional financing methods often do not allow for soft costs such as installation, freight, maintenance and software in loans. It must be paid directly from working capital. A lease, on the other hand, will allow soft costs to be covered, thus protecting working capital and allowing a single monthly payment for the entire acquisition.
7. Fast and easy
Depending on the dollar amount of the acquisition, conventional loans can take several days and require approval from higher levels within the financial institution. This may mean delays in receiving orders for much needed equipment. Credit processing for lease acquisition is generally very quick and can be as quick as a few hours to a couple of days. Again depending on the editing size.
8. Creativity and flexibility
Banks are particularly known for their creativity and flexibility. They are bound by bank laws that limit certain things to help their customer base. Leasing, on the other hand, has evolved into a financing method that focuses on the client’s specific requirements. Payments can be structured to accommodate irregular revenue streams throughout the year or set to match payback on a piece of equipment with measurable monthly savings. Leasing is the ultimate form of creative financing.
9. Purchase and Renewal Options
At one time leases were structured in such a way that the only purchase option available was the fair market value of the equipment determined at the end of the lease term. Over the years, the market has made it clear that they want a better purchase price determined at the start of the lease. As a result, most leasing companies will mutually agree upon the end of term purchase price at the beginning of the lease. This can range from $1.00 to 25% and is often reflected in monthly payments. In addition, the purchase option can be refinanced again under a new lease agreement for a period of typically 12 to 24 months.
10. Conservation of working capital
In a recent industry survey, the number one reason for leasing equipment is working capital savings. By using lease financing, working capital is freed up for use in the day-to-day operations of the business, such as purchasing inventory, advertising, trade shows, and hiring employees. Essentially, leasing allows a company to reduce the amount invested in depreciating assets and use the money where it will provide a higher return.
11. Simplified Estimates
Lease payments are shown as an expense on the company’s income statement. Because payments are fixed and pre-determined at the beginning of the lease, companies are able to forecast and budget intelligently into the future.
12. Capital budget for operating budget
In larger organizations, capital acquisitions generally require a higher level of approval than operating expenditures and consequently take longer. Lease acquisition, being a monthly expense, usually falls within the operating budget affording managers in various departments or business units to approve the acquisition of necessary equipment.
13. Tax Benefits
Because lease payments are treated as expenses on the income statement, the payments can usually be written off. Because each company’s financial situation is unique and accounting firms differ in their accounting procedures for leases, it is recommended that an accounting firm be consulted before deciding to lease based solely on tax benefits.
14. Low Interest / No Interest Programmes
From time to time equipment sellers will offer time sensitive low or no interest marketing programs to help them sell slow moving inventory. It is wise to look into these types of programs or ask the seller if there are any lease incentives available.
15. Master Lease Agreement
The Master Lease Agreement is the only document that contains all the terms and conditions of the lease and is signed once and covers all future lease acquisitions. A lease line of credit is usually pre-approved for a dollar amount that accommodates expected acquisitions over a period of time. As equipment is acquired, a simple one-page document is signed. It saves time and is effective in expansion or large projects.
16. Save Bank Credit Lines
No company wants to operate at the top of their credit line and is often reluctant to approach a bank for a credit line increase. It is prudent business practice to have funds available for unexpected events—a slow month or quarter, unpaid receivables, or an unexpected loss claim. The use of leases creates new credit facilities without affecting banking relationships.
17. Hedge against inflation
Leases allow for payments to be made in dollars and in return for increased inflated costs in future dollars as the equipment is used.
18. Competitive edge
Staying ahead of the competition often requires the latest and greatest technology. Equipment rental lets you get the job done more efficiently, more effectively, and more economically. In addition it offers the benefit of continuous upgrading to the latest available technology at a reasonable cost.
19. Sale and Leaseback
A sale and leaseback is a special lease transaction where the lessor will purchase unencumbered equipment from the company at fair market value and lease it back. This is a tremendous way to free up capital that is tied up in depreciating assets.
20. Enhanced Corporate Image
Fleet vehicles and production equipment, all affect corporate image. Leasing allows the property to look new, fresh and create an image of a successful company.
In summary, leasing came to be a means of acquiring equipment and it is no wonder that many equipment manufacturers have set up their OV leasing arms to help their customers acquire products in the most efficient way. Leasing just makes good business sense.
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