Lease to own or lease to return is a choice that many fitness centers have to make when they are considering leasing.
Most lease to own agreements transfer ownership of the equipment to the lessee at the end of the lease for $1. This is considered a capital lease and is very different from the average operating lease. The operating lease also has an end of lease option but the difference is it is not a fixed bargain rate.
Lease to return is often included in most operating leases but more often than not, this is difficult or impractical. The second best option when you sign up for this type of a lease is to renew the lease, which unfortunately, leads to higher equipment costs that greatly impact your finances.
Lease to own or lease to return can be good options for your fitness center depending on your circumstances.
Lease To Own
If you do not plan to return your gym equipment at the end of the lease, then the lease to own option is much more suitable for you. This is a traditional capital lease and it has a few risks. According to Financial Accounting Standards Board, a capital lease is a lease that transfers risk of ownership and all benefits to the lessee. There are specific criteria that are used to determine whether a lease is a capital lease or an operating lease and they are:
- Fair value
- Estimated economic life
- Bargain price option
You should evaluate your lease carefully and evaluate any risk factors such as terms that can eliminate the $1 buyout option and result in unwanted extensions.
Lease To Return
Lease to return or operating lease has plenty of advantages. For instance, the rates are much lower than those of a capital lease. If you decide to return the equipment, you can obtain a traditional low-risk capital lease.
Returning the equipment when you are done with it and the low costs are very tempting and understandably so. However, if the conditions for returning the equipment are unreasonable or you have unrealistic expectations of returning the equipment, you can end up with a much pricier transaction than the lease to own agreement.
Lease to return agreements can be great deals but only if the equipment is returned according to the provisions in your lease agreement. For instance, if you decide to return a treadmill at the end of the lease because it will be outdated, when the time comes, will you be ready to return it? Questions such as these might be easy to answer before signing the lease or acquiring the equipment but you might find that you are not logistically or operationally ready to return the equipment when the time comes.
The language involved in the lease to return contract is also another major risk. Some lease agreements that contain clauses such as “all-but-not-less-than-all” require that individual pieces of items be returned as per the agreed lease schedule or else full rent continues for every item on the schedule.
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Some of the return provisions of these lease to return agreements can result in undesired extensions so you have to carefully analyze your lease contract.
Why Not Consider Hiring A Professional?
Equipment leasing is a complex process and choosing between lease to own or lease to return further compounds it. Unless you have your own in-house team to help you with the leasing process or you are an expert on the subject matter, you should consider hiring an equipment leasing professional. This could be your financial advisor or your lawyer.
A professional can help you analyze the cost of lease to own and direct cash purchase. More often than not, lessees leave out hidden costs when calculating the total cost of a lease. When these costs are added up, you find that purchasing is a much cheaper option than lease to own.
A leasing professional can also help you find the best and credible equipment leasing company. Finding a leasing company should not just be about who has the lowest rates. It should be about who has the most competitive lease.
They can also help you to negotiate better leasing terms to enable you return equipment without any additional costs or undesired extensions.
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