It is true that if leasing companies for equipment did not exist, many businesses would not have been able to acquire equipment, whether through bank loans or through outright purchases.
The business of leasing commercial equipment has proven to be very profitable for plenty of equipment leasing companies. In fact, in 2011 alone, the gross total of profits earned within the commercial equipment leasing industry was a little over $600. Considering the fact that more and more new start-ups that require new equipment are constantly emerging, so that figure keeps on going up.
The equipment leasing industry continues to remain very complicated, regardless of the pace at which it is growing. One of the reasons this industry is so complex and complicated is because there are plenty of other financing options and in comparison to other industries, the equipment leasing industry is not well regulated.
Currently, there are three different categories of companies that lease commercial equipment and it is very important to understand how all three of them operate if you want to make sure that the one you choose meets the needs of your business appropriately.
Three Types Of Leasing Companies For Equipment
Vendor Leasing Companies
Depending on how an equipment vendor lessor decides to operate, equipment leasing can either be outsourced or it can be made into an in-house financing program. In most cases, the vendor’s equipment is simply outsourced by vendor lessors, which means that there tend to be quite a few limitations on how the vendor’s equipment can be used. There also tend to be quite a lot of conflicting conflicts and motivations in a majority of vendor leasing companies.
For instance, the senior manager in an equipment vending company may not show interest in selling additional equipment to a particular lessee even though the vendor lessor wants to extend rents so that more profit can be made.
Generally, the interests of the equipment leasing company and vendor lessors tend to vary because the lessors act as individual profit centers, separate from their parent companies. Similarly, significant amounts are charged by vendors for non-compliant returns and the returns are processed separately. Tracking these charged can be difficult and going through such a nightmare should be avoided.
Independent Leasing Companies
Independent leasing companies buy equipment after borrowing money from banks and that equipment is then leased to clients. Ultimately, ownership of the equipment is retained by a majority of these companies and this is clearly specified in their lease agreements.
Independent leasing companies are usually not very cautious when it comes to leasing equipment, which they may even lease equipment even if its value may rapidly decline at effective rates. They do not even care about the fact that they would probably not be able to earn any profit or eliminate any residual exposure even if their clients return the equipment on time as per the lease agreement’s terms. As a result, the highest risk contracts are offered by independent leasing companies to lessees, so these companies end up earning significant additional cash flows during the lease period.
Interest rates charged by bank lessors tend to be higher, while the cost capital tends to be lower in comparison to other types of equipment leasing companies. The reason behind this is that banks do not invest heavily on equipment, rather leases are perceived as transactions and money is made on the rates. The type of equipment that is to be leased determines the rates that they charge.
Bank lessors do not offer interim rent, instead, interim interest is offered by them. Interim interests happen to be interest only payments that the lessee has to pay instead of paying full proportional payments for leased equipment prior to the beginning of the lease period.
Interim interest certainly seems appealing, but it has a downside too. When bank lessors are chosen, lessees may find their end of term options quite challenging because return processes are outsourced. IT equipment is not leased by many banks and larger equipment is usually leased with higher residual values.
Choosing the right equipment leasing company that suits the needs of a business can prove to be a tricky task. This is why it is important to be aware of and understand how these three categories of equipment leasing companies operate.
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