What Are The Benefits Of An Equipment Lease Payment Calculator?

An equipment lease payment calculator has many benefits some of which you may not know about.

equipment lease payment calculatorBenefits Of An Equipment Lease Calculator

An equipment lease payment calculator is a utility used to calculate an estimation of the lease payments you are expected to make should you decide to enter into a lease agreement. It basically helps lessees estimate how much they would spend on lease payments. Keep in mind that lease calculators provide only estimates so you shouldn’t rely solely on them to make financial decisions when leasing equipment.

On that note, it is important to note that some equipment lease calculators are faulty and only generate false numbers to lure in naïve lessees. Some of them are only excel spreadsheets that don’t calculate your actual lease payments.

While it is important to choose the lowest lease rates, you have to consider some of the risks that come with leasing equipment. Once you have identified these risks, you can work with your lessor to reduce them and negotiate better lease terms.

Equipment Leasing Risks

Under the previous FASB guidelines, many businesses have a reason to acquire equipment through operating leases. Operating leases do not affect key financial ratios that are often a cause of concern for a company that wants its credit report left intact.

The Financial Accounting Standards Board has been working to revise U.S leasing standards to match international ones since the mid 2000s. A lease is considered an operating lease when:

  1. The equipment’s market value is less than 90% of the current minimum lease payments when discounted using an internal borrowing rate.
  2. If the equipment’s lease term is less than 75% of the equipment’s economic life
  3. If the lease does not have an end of term buyout option
  4. If the lease does not transfer ownership to you

Operating leases are popular among many business owners because they transfer the residual risk to the equipment leasing company. They offer off balance sheet treatment and lower monthly costs but very many things can go wrong with this kind of arrangement.

As a business owner, you should never forget every lease comes with significant risks and hidden costs. There is no doubt that lowering costs are worthwhile objectives when leasing equipment, but there is a high cost to be paid when your lease is not structured properly.

Many equipment leasing companies structure lease contracts in such a way that returning equipment on time is almost impossible. This drives many lessees to extend their leases and incur other costs in addition to their lease payments.

You therefore have to be savvy enough and steer clear of lease agreements that have the following flaws:

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  1. It doesn’t give you the option to purchase the equipment at the end of the lease term at a reasonable fair market value. In fact, the fair market value is determined by a vague method spelled out in the contract.
  2. The interim rent isn’t capped
  3. The possibility of defaulting is very high
  4. The notice requirements are very difficult to comply with
  5. It has hidden and recurring fees that are not part of the monthly lease payments.

The only way these lease risks can be managed is during lease negotiations. So instead of focusing on beneficial accounting treatment and low cost leases, you have to find a way to mitigate some of the risks included in a leasing contract.

The New FASB Guidelines

The new accounting guidelines by FASB clearly indicate that the operating lease treatment is no longer viable. Regular lease term rents will be included in the balance sheet.

This is a good thing because it gives businesses the opportunity to do a financial analysis of their equipment acquisition methods. Lease agreements are complex and they have their own risks so you should consider seeking the assistance of a trusted financial advisor or attorney.

Final Word

Leasing equipment is definitely one of the best ways to acquire equipment and an equipment lease payment calculator can help you get an estimate of the total cost of your lease. Equipment leasing gives you the chance to procure equipment at cheap rates but only if you understand the risks well enough to mitigate them during contract negotiations. Many businesses tend to enter into lease agreements without awareness that the numbers lease calculators generate can quickly escalate and even exceed those of traditional financing such as loans.

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