Need more information about leasing?
#1. The most common misunderstanding about leasing: Leasing can be very expensive.
If you look at the overall benefit of leasing as opposed to purchasing then this statement is not correct. But, if you are cash rich and look only at the total payments, then this statement can be true.
With equipment, money is not made by ownership but by the use of it. When you purchase equipment it depreciates quickly. You will also probably only have the equipment for 3 to 10 years and replace it. A lease allows you to upgrade the equipment easily.
Leases are also locked into today’s lower rates, which help to protect against varying prices from traditional bank financing. With a lease from National Equipment Leasing, you preserve your line of credit at a bank because your payments are from another funding source.
#2. Misunderstanding: Leasing takes more time.
To obtain a lease you will probably spend less time. Lease applications are usually much shorter than purchasing applications. Banks do not usually like equipment loans because they do not loan on the value of the equipment but on your business cash flow.
With a lease, it is much easier to dispose of the used equipment. Part of your lease can say that it will go back to the leasing company. Maintenance of the equipment can also be included.
#3. Misunderstanding: Before the lease is up, the equipment will be outdated.
Equipment that would be affected by technology updates should have a lease that will allow for the advancements.
#4. Misunderstanding: Leases offer no flexibility.
Your lease should be beneficial. Lease terms can be flexible depending on the equipment. Most leases are from 3 to 5 years. There are a variety of types or leases that fit almost all goals and objectives:
A Capital Lease is shown as a long-term debt for accounting purposes. It refers to the ownership of the equipment in several different ways:
- During or at the end of the term, the lessor/equipment owner transfers ownership to the lessee/equipment user.
- A Capital Lease contains the option to purchase the asset at a bargain price.
- The lease term is equal to 75% or more of the estimated economic life of the equipment.
- The current value of minimum lease payments equals 90% or more of the fair market value using lessee’s incremental cost of borrowing.
If your intent is to own the equipment at the end, then a Finance Lease may be the right choice for you. You payments can be made over a longer period of time making the monthly payment less. At the end of the term the lease close-out is a minimal payment or percentage of the original cost.
- A Finance Lease is a full-payout, non-cancelable agreement.
- Lessee is responsible for maintenance, taxes and insurance.
An Operating Lease is to use with equipment that will provide for technology advancements. It usually has a lower monthly payment, but the lessor usually takes a risk of ownership. There are some tax benefits, so it is not documented as a liability or asset. You can also qualify for purchase at the end.
- An Operating Lease is considered any lease that is not a capital.
- These are usually for short-term leases of equipment.
- Lessees can acquire use of equipment for a fraction of the asset’s useful life.
- An operating lease cannot violate any of the four criteria stated in a capital lease.
True Lease is a good choice for equipment that has a lot of technological changes because the lessor keeps ownership of the equipment. This lease has flexible terms at the end of the lease: continue to lease, purchase or return.
- This agreement is recognized by the Internal Revenue Service as a rental agreement.
- Monthly lease payments are fully tax deductible, which is an advantage to the customer.