What Are The Pros And Cons Of Commercial Equipment Leasing?

Commercial equipment leasing effectively saves taxes, cash and may allow the business to invest in other more pressing needs.

commercial equipment leasingCommercial equipment is an absolute necessity in order to effectively compete in the era if automated production techniques. Commercial equipment covers virtually industries from manufacturers, to distributors and a horde of other service companies as well. Even with hundreds of finance companies, not all business entities are in a position to finance their commercial equipment acquisition either through cash or installment purchasing.

Further, purchasing equipment must be justified by employability in the business and how the purchase may likely affect business cash flow position. It is for this reason that a business can opt to lease rather than purchase. A leasing agreement involves a lessee who makes payments called rent to an equipment owner, the lessor in order to be allowed use of the equipment.

However, the greatest advantage of leasing business equipment usually turns out to be the disadvantage in one way or another. Take for example, not owning the equipment means you may not be required to maintain the equipment especially for heavy machinery. However, this may also mean that restrictions are placed in the manner in which the commercial equipment can be used. For example, movement of the equipment may be restricted without permission from the lessor.

Other Pros And Cons Of Commercial Equipment Leasing

Financial Obligations In A Lease

By leasing, a business will obtain the commercial equipment up front without having to pay the full fee. The little initial expenditure is often favorable to young businesses that have not created business reserves and are in dire need of the commercial equipment for productivity or ease of doing business.

The disadvantage of this kind of business obligation is that the business almost certainly ends up paying more for the equipment in the long run than it would have under a cash purchase consideration. Interest, coupled with numerous installments, mean that the business will eventually pay more for the commercial equipment.

Taxation

Leasing is advantageous to the company when taxation is generally taken in to effect. This is because lease payments are tax deductible and the business will therefore obtain some tax savings. In addition to tax saving, leases last several years and depending on the tax jurisdictions will allow for capital allowances. While leases are advantageous with respect to taxation, when the business depreciates the asset, that depreciation will not be taken into account when accounting for depreciation. Instead, the depreciation deducted from profits is added back and capital allowances calculated instead.

Management Of Finances

Another pro that leases present compared to other means of obtaining finances is the ease of managing rental payments. Purchasing a machine on cash or through a loan is sometimes stringent and comes with heavy penalties when the business defaults. With a lease, however, the business may be able to plan its funds all the while limiting unexpected expenditures. When lease agreements are complex, however, the company may experience a burden in managing them.

Technological Improvements

Certain commercial equipment requires regular technological upgrades. Apart from electronic devices, the lessor may fail to stipulate what happens in case a better and more efficient model hits the market. If the company is still tied to the lease, then there is an opportunity cost in terms of forgone improvements in production or business efficiency. This is one area that may require business advice from professionals if the machinery or commercial equipment in general is likely to face technological obsolescence.

Final Word

There are certain perks that may be associated with a lease and are thus advantageous to your business. Leasing companies enjoy freedom from maintaining the leased equipment. Maintaining a company may have two parts: labor costs and purchase of spare parts. This relieves you of the burden of maintenance especially if the equipment needs highly specialized handling or is costly to maintain. However, these perks may be disadvantageous if they tie the company to the lease for a longer period of time. When the company is obligated to the lease, you may have to make payments even when the premium derived from the lease already wore off.  All in all, while a lease may look suitable to a company from the onset, it can be riddled with challenges which have to be weighed from the start.

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