The Truth Behind How An Equipment Lease Works

Most business owners are hesitant to sign up for leases because they are not sure how an equipment lease works. Once you understand how it works, you will be able to reap all the benefits that come with leasing equipment.

how an equipment lease worksOne of the benefits of leasing equipment is that you get to save money. It is the preferred method of obtaining equipment especially when a business is just starting out. Instead of making a cash purchase on expensive equipment, which might become obsolete after a period of time, you can lease the equipment. What’s more, a business can obtain high quality equipment and even upgrade it at the end of the lease. You can choose from a variety of different lease options provided you are well aware of what each option entails.

What Leasing Equipment Entails

Leasing works for any type of business, it does not matter if you run a hospital, a gym, a restaurant, a school, etc. You can lease anything that helps the operations of your business run smoothly. This includes soft costs such as consultation and installation, software, hardware, and all types of capital equipment. Over 80% of American businesses lease at least one of their equipment and 90% say they would lease again if the need arises.

The biggest question, however, that many people would ask is why not simply take a bank loan and purchase the equipment that you need? Here is why most businesses don’t find this idea practical:

  1. Banks require you to pay a 10-20% down payment
  2. Banks have restrictive covenants. They might decide to give or deny you a loan based on your credit score.
  3. Banks require collateral

Applying for a lease is much easier and takes a shorter time than applying for a conventional bank loan. Moreover, a lease allows you to finance 100% of your costs. Most lease agreements include installation costs, shipping and maintenance as part of their costs. The cost is usually spread out evenly over the term of the lease so your money won’t be tied up in equipment.

Making a direct cash purchase on your equipment is also not practical unless you have sufficient cash flow. There is a myth that says only companies with insufficient cash flow should lease their equipment. The truth is that even big corporations and government agencies lease their equipment not because they do not have enough cash flow, but because they know they can realize significant tax savings and can avoid the risk of the equipment becoming obsolete.

What Are The Purchase Options In A Lease?

Purchase options are usually determined before the lease agreement is signed. It is important that you have a lawyer who is familiar with leasing go through your contract before you sign it. Moreover, a lawyer will be able to negotiate better terms for you because it is their area of expertise.

Leasing offers a number of buyout options for your equipment. They include:

  1. $1 buyout. At the end of your capital lease, the leasing company will transfer the equipment to you at the price of $1.
  2. 10% put. At the end of the lease, you will purchase the equipment by paying 10% of its original price.
  3. Fair market value. At the end of your lease term, you will be required to purchase the equipment for its then Fair Market Value

You can also return the equipment at the end of the lease if you do not want to purchase it or simply extend the length of the lease agreement. Remember that you have to check your agreement and ensure that the option you see best suits your business is indicated.  Most leasing companies require lessees to write a notice of the option they want to select before the end of the term. Again, it will be up to you to review your contract and find out exactly when you should write the notice.

Last Minute Reminders

As you might have already noticed, signing up for a business equipment lease is a very beneficial option for your establishment. It is important that you keep the following pointers in mind especially when you are still looking for a suitable leasing option:

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  1. Always run background checks on your target leasing companies.  This will help you determine if the firm you wish to work with has a good reputation, is credible and legitimate.
  2. Consider the features of each lease agreement. This will ensure that you get the best possible terms in the market.
  3. Thoroughly review the terms and conditions of your equipment lease. This prevents you from signing a contract that you will regret later.

To find out more about how an equipment lease works, CLICK HERE for a free quote.