How can open equipment leases be more or less beneficial than other leases?
All businesses need a straightforward, cost-effective way to get everything they need. It can be tough affording everything for your company, especially when you’re just starting. New businesses tend to skimp on everything they get so they can afford everything they need on their limited capital.
However, the issue with buying a subpar setup is that you don’t want to offer low quality. Your business is new and relatively untrusted, and if you’re not providing something exceptional to customers they won’t want to come back.
You only get one chance to start your business, and you want to do it right, but how can you accomplish true success in your business on such limited funding? The answer is through finding workarounds as far as getting everything for your business.
A common example is equipment: there are ways to get equipment without having to pay for everything up front. That way, you get effective equipment and don’t drain all of your initial funds. However, is taking out a bank loan really a good option for your business in the long run?
Should you just get an equipment lease? How do open equipment leases work compared to standard leases, and are open leases better?
Getting a Loan to Afford your Equipment: What are the Pros and Cons?
Taking out a bank loan is essentially having someone else pay for your equipment, and this can be incredibly useful because you don’t have to pay anything off the bat. Plus, with a good credit score, your interest rate will be incredibly small.
The issue with loans is that you have to deal with paying off the loan at some point along with the responsibilities of owning that equipment. You technically own the equipment still despite not paying for it, meaning you have to pay if the equipment falls into disrepair.
This can be tough while you’re trying to amass the funds to pay off a loan. Plus, this kind of situation can put you in an incredibly difficult place financially later on if you don’t pay off that loan.
If, a few years after buying the equipment, it needs replacement, and you still haven’t paid off your loan, you dig yourself into a huge hole financially. Loans are very risky, especially for capital equipment, which is why you should have a good financial plan to tackle them and be sure that the equipment has some longevity to it.
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How does Leasing Work for a Company?
An equipment lease is designed to be more manageable financially, as you pay a low flat monthly rate to have equipment loaned to your business. Because you don’t own the equipment, you don’t have to deal with the negative consequences of maintaining the equipment, but you get full use of the equipment in your business.
There aren’t a lot of benefits to ownership; with a lease, the company will repair the equipment for you versus you paying through the nose to replace the equipment or maintain it.
Leasing also has tax benefits, meaning every year you essentially get some more funding for your business and the equipment. Leases go for a contract period, and at the end of the contract you can choose to renew the lease with an upgrade on equipment or purchase the equipment at a haggled rate.
How do Open Equipment Leases Work?
Open equipment leases work fairly similar, except they have an appraisal system before you purchase the equipment at the end of the contract period. All equipment depreciates in value, so the equipment is appraised at the beginning and the end of the lease, and the difference between the appraised value and the actual value is paid by you or the leasing company depending on the value of the equipment.
For example, say the equipment is appraised to be $10,000 upon start of lease and is predicted to drop to $7,000 at the conclusion of the contract. If the equipment is appraised at the end of the lease to be more than the predicted $7,000, then you took good enough care of the equipment that the leasing company pays you the difference.
If you the equipment drops below that $7,000, then you pay that difference to the leasing company.
Getting equipment always depends on your business’s needs, but getting open equipment leases, equipment leases, or even bank loans could work out to your advantage depending on the setup. To learn more about different types of leases, like open equipment leases, click here.