Equipment leasing is a very popular source of financing for purchasing machinery and equipment.
The Equipment Leasing and Finance Association estimates that four-fifths of businesses in the United States lease some of their equipment. Overall, over 35% of all equipment is leased in the U.S.
Equipment leasing is often the ideal solution for startups to obtain equipment because they don’t require upfront costs.
One of the big reasons why equipment leasing is so popular is that a large down payment is not required. In fact, many equipment leases are 100% financed. In comparison, conventional debt financing usually requires a 10-20% down payment.
Equipment leasing is also popular because it spreads the cost of the equipment over the entire term of the lease.
Oftentimes with leases the soft costs such as shipping, installation and maintenance are divided into monthly payments and rolled into the lease. This then allows businesses to predictably budget their equipment expenses.
Many companies choose equipment leasing because it offers smaller monthly payments compared to conventional loans.
In most cases, monthly lease payments are significantly less than what would be paid if equipment was purchased with a conventional loan. This is especially true for “operating leases” or “true leases.” With operating leases, the lessor retains full ownership of the equipment and there is no predetermined buyout. At the end of the term with true leases, the lessee can choose to either return the equipment, renew the lease or buy the equipment at fair market value.
Equipment leases help startups afford better equipment than what they could purchase with a conventional loan.
Because equipment leases have a lower monthly payment, it allows lessees to afford upgraded equipment. Better equipment often translates into higher productivity and increased profits.
Leasing allows you to easily replace or upgrade equipment to keep your business competitive
When you own your equipment, you always run the risk that new technology will render your equipment obsolete within a few years. This outdated equipment can be difficult to sell. At the end of a true lease term, you can choose to either return the equipment, renew the lease or buy the equipment at fair market value.
Equipment leases are also popular because of their payment flexibility.
Some equipment leases called “deferred payment leases” allow you to defer your first payment for up to 90 days. Another type of lease that provides payment flexibility is called the “step up lease.” Step up leases charge lower payments initially. With this type of lease program your lease payments increase over time. As a result, your payments can be tailored to your expected growth in revenues.
One other type of equipment lease that provides a flexible payment plan is called the “skip lease.” Skip leases allow you to skip payments on certain months of the year. This is especially popular with seasonal businesses.
If you want to eventually own the equipment that you are leasing, a “finance lease” or “capital lease” is what you want to ask for.
With a finance lease you will own the equipment at the end of the lease for a minimal amount such as a fixed percentage of the original cost or $1.00. Be aware that finance lease payments are significantly higher than operating lease payments.
Tax deductions are another reason why you might want to consider a finance lease over an operating lease.
Finance leases allow you to deduct expenses sooner than equivalent operating leases. Since you will eventually own the equipment at the end of a finance lease, you get to deduct depreciation and the interest component of the lease payment.
There is one disadvantage to equipment leasing.
One major disadvantage of equipment leasing is that the lifetime cost of the equipment is much higher if you lease it versus purchasing it. As a result, you may want to consider debt financing if your goal is to own your equipment.
In summary, equipment leasing is often the ideal solution for startups to obtain equipment.
Equipment leases are often much easier to get compared to conventional loans. They also minimize your up-front costs and monthly payments. Many lease plans also provide payment flexibility that is not offered with a loan.