Leasing companies for equipment have helped a lot of businesses acquire equipment that they would not have otherwise been able to access through bank loans or outright purchases.
Did you know that information technology equipment is the most leased type of equipment? Leasing of commercial equipment has been a very profitable business for many leasing equipment companies, grossing a total of $628 billion in 2011. The figure has gone up considering the number of upcoming businesses that are in need of new equipment.
Despite the rate at which equipment leasing is growing, it still remains a very complicated industry. One of the factors that contribute to its complexity is the fact that there are many alternative financing options and it is a relatively unregulated industry when compared to other industries.
Leasing companies for equipment come in three categories and understanding the way each one of them operates is very important because it will help you choose which company best meets your business needs.
3 Types Of Leasing Companies For Equipment
Vendor Leasing Companies
An equipment vendor lessor can decide to outsource equipment leasing or make it an in-house financing program. Most vendor lessors only lease the vendor’s product, which limits their use of the vendor’s equipment. Most vendor leasing companies have conflicting motivations and conflicts. For instance, the senior manager in an equipment vendor company is not interested in maintaining a positive relationship and selling additional equipment to the lessee but the vendor lessor wants to make a profit by extending rents. Many vendor lessors are separate profit centers from their parent companies which could be part of the reason why their interests might be conflicting.
Vendors charge significant amounts for non-compliant returns and process their own returns. These charges can be hard to track and nobody wants to go through that nightmare.
Independent Leasing Companies
Independent leasing companies borrow from banks to purchase equipment that they in turn lease to their clients. Most of these companies retain ownership of the equipment and clearly say so in their lease agreements. They are usually willing to lease equipment that rapidly declines in value at effective rates even if it means that if the equipment is returned on time according to the terms of the lease, it would be hard for them to earn a profit or get rid of any residual exposure.
Independent leasing companies therefore offer the highest risk contracts to lessees, which can result in significant additional cash flows over the lease period. Some independent lessors can of course accept various lease costs but this requires ongoing monitoring of performance.
Bank lessors have higher interest rates and low cost capital than other types of leasing companies for equipment. This is because rather than investing heavily on equipment, banks perceive leases as transactions and make money on the rates. The rates that they offer may vary widely depending on the type of equipment that you want to lease.
Instead of offering interim rent, they offer interim interest. Interim interests are interest only payments made instead of full proportional payments for the equipment received before the lease period begins. Interim interest is important and can a bank proposal look very good.
The downside of choosing bank lessors is that their end of term options can be a challenge for lessees because they outsource their return processes. Many banks do not lease IT equipment and prefer to lease larger equipment with higher residual values.
Having mentioned the three types of leasing companies for equipment, it may still not be easy for you to choose a company that suits your needs. It is very easy to find yourself paying much more than you initially anticipated if you are not familiar with the equipment leasing industry.
The first thing that you have to understand is how the lessors make money so it is not as simple as comparing rates. How a lessor makes money will be reflected in the way they structure their leases. As you may have previously noted, the three different categories of lessors have different business models so you should factor this in when you are comparing lease options. Consider all the risks first before signing your equipment lease contract.
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