This is a brief discussion on the capital equipment leasing industry, its importance to the US economy, major types of leasing contracts and the many advantages of leasing as opposed to making an outright purchase.
The capital equipment leasing industry plays a major role in the economy of the United States. 2013 projections serve to illustrate just how important this industry is in capital formation. Out of the $1.3 trillion that analysts projected would be invested in plant, software and equipment a staggering 55 per cent or $742 billion was to be financed through leases, loans and lines of credit.
These figures are hardly surprising when you consider the fact that many businesses of all sizes cannot do without having to lease equipment at some point so as to continue to operate and turn a profit.
And equipment finance firms tend to offer a wide range of products and options so that any business can easily find the most ideal option taking into consideration their situation and financials.
What Kind Of Businesses Should Ignore The Capital Equipment Leasing Industry?
Some people believe that equipment leasing is only suitable for certain kinds of businesses and industries. This is not true. Actually any business irrespective of its’ size and financial strength can benefit hugely from leasing rather than making an outright purchase. With proper planning it will always be the most cost effective option with many benefits. Even if your business is just starting out it is not difficult to get a lease of up to $100,000 based on the personal credit of the owner.
Where Do Leasing Companies Get Financing?
The leasing industry has always proved to be extremely attractive to capital market investors because of its’ predictable and fairly safe returns. The leasing companies use these funds from investors to purchase equipment and they are then eager to ensure that this equipment gets fully utilized and leased out so that they are able to meet their financial obligations and investor’s expectations. This coupled with the competition in the market results in increasingly attractive monthly payments for those interested in leasing the equipment. Still the leasing companies need to be cautious and will always be keen to look for customers with good credit scores who can prove that they are capable of meeting the monthly payments without any problems.
Reasons To Lease Equipment
There are plenty of good reasons to take the leasing option. For many entrepreneurs its’ biggest attraction is the fact that it calls for much smaller upfront payments coupled with flexible payments. This is in sharp contrast to involving banks where they may require substantial down payment. In this way a lot more funds can remain available in the business for other needs.
Secondly in some industries equipment tends to grow obsolete rather fast and yet it will often be very costly. In this case leasing is the smartest option.
Thirdly there are some instances where contracts are short and seasonal which means that there is no point in purchasing the equipment because it becomes even more expensive for the business if it has to lie around unused for long periods of time.
The Tax Advantage
Some smart finance accountants always structure leases so that it reduces the taxes that they have to pay. When you can deduct lease payments as a business expense it is often better than depreciating the value of the same equipment purchased outright.
Is There A Limit To What Can Be Leased?
There is hardly a limit to what can be leased. From the most obvious in industrial equipment like forklifts and conveyor belts to office technology like the latest LCD projectors and copiers to every-day business essentials like phone systems and furniture.
Main Types Of Equipment Lease Financing
Lessors will usually have many different names for leases but they all fall under two main categories. Namely finance leases and true leases.
True leases are also referred to as operating leases, tax leases or fair market value (FMV) leases. They will usually fall short of the expected life of the equipment giving the lessee the option of either returning the equipment or buying it outright at a fair price based on the market value. Payments are therefore lower because the equipment can be leased out again to another customer.
Finance leases are also called dollar buy out leases or conditional sales or capital leases. This contract is designed for customers who want to keep the equipment in the end. The payments will be higher and will tend to last the useful life of the equipment.
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