How does Leasing Work, and what is an Open End Lease?

How does leasing work as opposed to purchasing equipment? What is an open end lease? 

open end leaseIf you’re just starting your business, it’s important to know how crucial every decision you make is, and that you should be cautious and do as much research as possible before picking a specific option. This is especially the case with your finances, because if your business is not structured well as far as money goes, you can’t make a profit, which allows your company to continue running.

Most businesses have a financial structure that relies heavily on their equipment, simply because their equipment is either so numerous or so complex that the price of the hardware is high. However, since these same businesses depend on quality equipment in order to bring in customers and make a larger profit, newer companies have trouble determining how much they should spend in order to get the equipment they need.

A good example is fitness centers, which need quality and quantity in their hardware, but that hardware is expensive. Examining all of your options is important, whether you’re looking at purchasing the equipment with or without a loan, figuring out how a lease works, or determining what is an open end lease.

Purchasing Hardware

Purchasing equipment isn’t a question on how much you’ll spend short term; it’s all about the long term, which is why buying equipment can be so troublesome. Many business owners do it so they can get ownership of the hardware right off the bat.

However, it is sometimes better to wait on purchasing equipment and seeking an alternative; because equipment can give you trouble over time. You can easily get equipment without draining your funds too much; you get to claim hardware as a business asset, providing you funds for the equipment, or you can simply take out a bank loan.

However, over time all equipment either breaks or becomes outdated, and these two obstacles will often lead to you having to replace the equipment. If you’re a new business, you’re still trying to get ahead of competition and start making a profit, and you can’t handle having to buy all that hardware again.

Worse, if you did get a loan, and you still haven’t paid it off by the time your equipment needs replacing, all you’re doing is digging yourself in a deeper hole financially.

What is Leasing?

An alternative to purchasing equipment to help you save money and help your business improve in the long run is leasing. Leasing is straightforward: you’re given a contract with set specifications, but the basics involve you paying a flat, monthly rate in exchange for use of the equipment loaned to you.

There are benefits attached to leasing including tax deductibles, getting hardware replaced if it breaks down, and getting potential upgrades at the end or during a lease. Leasing is convenient because it gives you the freedom to start up your company without dealing with the harsh responsibilities of maintaining your equipment, simply because newer businesses just don’t have the funds to do so.

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Leasing gives you space and options; at the end of a lease you can purchase the equipment, return it, or continue the lease and get an equipment upgrade.

What is an Open End Lease?

There are many risks associated to leasing and open end leases that can be managed better by careful business owners who do their research and know what they’re getting into. Many wonder what is an open end lease; basically, your equipment has a set value when it is first leased to you.

Over time, the value drops, whether it’s because of how you take care of the hardware or just because it is older and outdated. You are given a value as to the estimation of what the value of the hardware will be at the end of the lease. Then, at the end of the lease, the equipment is appraised at its actual value, and depending on whether it’s worth more than the predicted value or less, the sum is paid to you or from you to the leasing company.

For instance, say you lease hardware that had an initial value of $10,000 and the value was $5,000 at the end of the lease. If the hardware was initially predicted to be worth $6,000 at the end of the lease, it means that you owe the leasing company $1,000 because the equipment is worth $5,000 and should have been worth $6,0000.

This is called a balloon payment, and assuming you are purchasing the equipment at the end of the lease, this payment is added on to the price of the hardware. Likewise, if the equipment was predicted to be worth $4,000, you are paid the $1,000, because the equipment you leased is worth more than the predicted value.

Is it worth Getting a Lease?

Leasing involves risks like these, but since leasing is all in the contract, you can determine whether the lease you’re getting is something you want.

If you believe the equipment will end up costing you money at the end of the lease based on the terms displayed in the contract and your own research, don’t agree to the open end lease.

Leasing can be of use to you, but only if you make sure you’re getting the best setup possible. To learn more about what is an open end lease, click here.