Raptor Financial Group
Equipment Leasing: A Guide for Business Owners
Updated: Jul 19, 2022
You don't have the funds or the desire to buy equipment outright? Here's everything you need to know about leasing equipment.
Equipment is costly, and many small businesses may not be able to afford to purchase everything they require up front. Leasing equipment allows you to spread the cost over a set period of time.
When you lease equipment, you don't have to worry about it becoming obsolete because you don't own it.
You pay a fixed rate for a set period of time when you lease equipment. The payment includes the interest and fees. Contracts for equipment leasing typically last three, seven, or ten years.
This article is for company owners who are thinking about leasing equipment.
Equipment is costly to purchase and maintain, and it's only a matter of time before a new version is released, rendering yours obsolete or inferior. Many small business owners choose to lease equipment due to the high costs of owning and operating it.
Leasing has advantages over owning, such as lower monthly payments that are typically spread out over months or years rather than delivered in one lump sum. Many commercial equipment leases include service agreements or service add-ons, which provide business users with peace of mind and eliminate the need for in-house technicians.
If your company requires new technology or equipment but cannot afford it, leasing may be an option to consider. Instead of purchasing something all at once, leasing allows you to make smaller monthly payments over a longer period of time. You have the option of returning the equipment at the end of the lease or purchasing it for a price that takes into account appreciation and how much you paid over the course of the lease.
What is the definition of equipment leasing?
Equipment leasing is a type of financing that allows you to rent rather than buy equipment. You can lease expensive machinery, vehicles, or computers for your business. The equipment is leased for a set period of time; after that, you have the option of returning it, renewing the lease, or purchasing it.
Equipment leasing differs from equipment financing, which involves taking out a business loan to buy the equipment and repaying it over a set period of time using the equipment as collateral. In that case, once the loan is paid off, you own the equipment.
When you lease equipment, you don't get to keep it once the lease term is up. When leasing equipment, you pay interest and fees just like when taking out a business loan, and they're usually included in the monthly payment. Insurance, maintenance, and repairs may incur additional charges.
Equipment leasing is more expensive in the long run than buying it outright, but it is a way for cash-strapped small business owners to get necessary equipment quickly.
What is the process of leasing equipment?
You enter into a lease agreement with the equipment owner or vendor if you choose to lease equipment for your business rather than purchasing it outright. The equipment owner drafts an agreement, similar to how a rental lease agreement works, stating how long you will lease the equipment for and how much you will pay each month.
You can use the equipment until the lease expires during the lease term. There are some circumstances in which you can break your lease - and these should be specified in the contract - but many leases cannot be broken. Depending on the vendor, you can usually buy the equipment at the current market rate or even lower once the lease is up.
The cost of leasing equipment varies depending on the leasing company. The rates you’re quoted are also influenced by your business credit score. The more risky your lending is, the more expensive it will be to lease equipment. In just a few Minutes, you can approve an equipment lease online. Because leasing companies tend to specialize in specific industries, doing your research to find the best financing option for your company is critical.
Depending on the type of equipment, lease terms are usually three, seven or ten year.
Because equipment leasing is not a loan, it will not appear on your credit report and will not affect your ability to borrow. If you use the equipment for your business, the IRS often allows you to deduct your lease payment.
The Advantages of leasing equipment
Small businesses with limited cash flow can benefit from leasing equipment. While not all equipment leases are credit equal and there are numerous ways to finance a lease, here are some of the benefit of leasing your equipment:
Getting started is inexpensive. Many Lessors do not demand a large down payment.
You can upgrade your gear. If you need to replace equipment frequently, leasing is a good option because you won’t be stuck with outdated equipment.
It’s less difficult to scale. You don’t have to sell your existing machinery and go shopping for replacements if you need to upgrade to more advanced equipment to handle a high work volume.
How do I get started leasing equipment?
Answer the following questions before beginning your equipment leasing process. It may appear to be a lot of work up front, but you won't be able to make an informed decision on leasing or purchasing equipment unless you answer these questions as they apply to your company.
What is your monthly financial plan?
Although leasing has lower monthly payments than buying, you must still factor the costs into your monthly cash flow. Start with what you can afford and work your way up from there; don't start with price quotes and then try to fit them into your budget.
How long do you intend to use the equipment?
Leasing is almost always the most cost-effective option for short-term equipment use. A loan or standard line of credit may be more beneficial if you plan to use the equipment for three years or more. Consider your company's growth as well: if your company is rapidly expanding and evolving, leasing may be a better option than buying.
How quickly will the equipment become obsolete?
In some industries, technology becomes obsolete more quickly than in others. Before deciding whether you should buy or lease, think about obsolescence.
Can the equipment be leased?
The types of equipment that can be leased are practically endless. However, there are some restrictions.
Purchase price: Equipment leases allow your company to obtain high-dollar equipment and machinery. This includes both expensive single items, such as heart monitors and extraction machinery, and less expensive bulk items, such as kiosks, software licenses, and telephones. As a result, leasing agreements for purchases under $3,000 are uncommon, and many large lenders require a minimum purchase of $25,000 to $50,000.
Hard assets: Any equipment that could be listed as personal property and is not permanently attached to real estate must be considered a hard asset. Employee training programs and warranties, for example, are not eligible for lease programs.