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Equipment Leasing

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The ins and outs of equipment leasing

When a business is in the startup phase, the owner often needs to lease equipment in lieu of purchases because of the latter's overhead costs. The equipment leasing process can be relatively complex, but yields many benefits to businesses that are either just beginning or expanding.

The equipment leasing industry is very large, and the Equipment Leasing and Finance Association (ELFA) cites businesses lease roughly $1.2 trillion in assets annually, from office equipment to software and computers. The organization notes that equipment financing companies are responsible for a large piece of the overall capital expenditure budget across the country.

Equipment loans and equipment leasing are two distinct processes. Some defining differences in leasing include fixed rates compared to market fluctuations when acquiring a loan, as well as more tax benefits, avoidance of obsolescence and lower down payments when leasing compared to equipment loans.

Understanding equipment leasing terms

When navigating the equipment leasing process, it is important to know the common terms and phrases associated with the industry. Here is a quick rundown:

  • Advance lease payments: Payments made in advance of the standard payment periods, sometimes demanded by a lessee's specifications.
  • Commitment deposit: The down payment as dictated by the lessee, though typically around 2 percent of the equipment's overall value.
  • Fair Market Value (FMV): The accurate and fair valuation of a fixed asset, depending on current and sometimes projected market conditions.
  • Off-balance-sheet financing: Equipment leases are often a form of off-balance-sheet financing, as they do not reflect any debt on a corporate balance sheet because the lessor does not technically own the rights to the assets.
  • Rate factor: Periodic payment made for equipment in accordance with the percentage of the equipment's cost.
  • Useful life: The accurate projection of a lease's operable lifespan. In most cases, the asset must have a remaining life of around a quarter of the original term, which must also be at least one year.

Overview of equipment leasing

In most cases, the owner of the equipment (lessor) will be a business, which lends out the equipment to a lessee at a price - including principal and interest - that it sees fit. The lessor and lessee will agree upon the terms of the equipment lease, including the payments and time period of the lease.

Potential items to lease are relatively boundless, so long as they fit the needs of your business, and include hardware, capital equipment and even soft costs such as installations.

In some instances, the lessee will work through the rental process to eventually own the equipment the lessor has provided, while in other situations the rental will simply end at the terminus of the leasing agreement.

Business owners should be well-versed in the types of leasing agreements before beginning the acquisition process.

  • Closed-end leasing: This type of lease is also known as a "true lease" and "walk away lease," as it does not entail any type of purchase obligation before or at the terminus of the rental. One advantage of this type of lease for the lessee is that it negates risks associated with depreciation, or the calculated value that a fixed asset loses each year. This is often the most flexible, cost-effective form of a lease, and is the best choice for any asset that loses its value quickly.
  • Finance leasing: Also known as a capital lease, an agreement in which the lessee will own the equipment at the lease's terminus, generally for a fixed percentage of the original value or $1 past the full value and interest in the payment structure. The lessee is often responsible for paying the lessor ownership costs, as well as handling insurance, maintenance and tax expenditures related to the fixed asset, making this the best choice when the lessee is certain that he or she will want to purchase the item at the end of the lease.
  • Gross lease: Mostly used to describe a commercial real estate lease, this agreement is characterized by the lessor's responsibility to pay associated building costs, such as maintenance, taxes and insurance. The lessor does have the right to adjust the agreement, so as to better oblige all tenants' specific demands.
  • Lease purchase: This agreement often includes either a mandatory obligation to purchase the equipment or real estate at the end of the lease's payment period, or an option to do so pending the lessee's preference.
  • Skip Lease: An agreement in which certain payment dates are skipped per the lessee's request and lessor's approval. This offers more flexibility, making it a good choice for businesses with inconsistent cash flow.

Why lease equipment?

In most cases, a business will only lease equipment because it needs to, likely because of cash flow worries or other financial shortfalls. There are several advantages to leasing equipment as opposed to simply purchasing fixed assets.

  • First and foremost, equipment leasing leaves your working capital and lines of credit free for other obligations and opportunities. Further, the down payment on a lease is often lower than one on an equipment loan.
  • With some lease agreements, you will not be responsible for certain maintenance expenditures and other costs associated with the equipment.
  • When you purchase a piece of equipment, it will need to be declared come tax season. Leased items are often free from this, while tax deductible payments are commonplace when proving the payments are operating expenditures.
  • Finally, you avoid the risk of purchasing expensive equipment that your business will not need in the future. Most times, the agreement will only last for the term of the leased equipment's or technology's useful life.

Find machine & equipment lessor

BoeFly is the perfect place to secure get matched with the most preferable lessor possible. Through complex algorithms, your one application will be weighed against the specifications of thousands of lenders, including equipment lenders and lessors, providing the most efficient and effective process available and ultimately helping to deliver the best terms for you.