There are numerous benefits of leasing, a method of financing equipment which has been popular for many years. It provides some very unique benefits over conventional bank financing or an outright purchase, and here are 20 reasons to lease equipment.
1. Pay As You Use
Leasing highlights the utility value of the equipment. In other words, leasing provides the opportunity to pay for equipment as it is generating revenue for the company. No different than paying employees bi-weekly or monthly as opposed to pre-paying them for the next 2 or 3 years of work. Both are assets of the company, and it makes no sense to pre-pay for either.
2. Payments Are Fixed
In most cases, lease payments are fixed for the duration of the term. This has a major advantage over conventional bank loans or purchases from a credit where the interest rate is usually based on a floating rate. Knowing in advance what the payments will be, facilitates ease of budgeting and reduces interest rate risk.
3. Longer Terms / Lower Payments
Many banking institutions will limit the term of a loan to 12 or 24 months, at which time the rate and terms of the loan are re-negotiated. Based on the useful life of the equipment being leased, it is not uncommon to see fixed lease terms as long as 48 or 60 months. This in effect lowers the monthly payment at a fixed rate.
4. Obsolescence Protection
In this era of major technological advances, certain types of equipment purchased today, can be obsolete within one or two years. Most leases offer a provision to economically upgrade equipment within the last year of the lease contract, thus giving the company a built-in obsolescence protection. In addition, although the leasing company holds title to the equipment, it will generally allow the vendor to provide a trade in on the existing equipment.
5. No Down Payment
Conventional banking institutions will generally require a down payment of 10%-25% in order to undertake financing on most equipment. In a lease transaction, the entire amount is financed with only the first or first and last payment being required at the time of lease initiation. In some cases where the financial strength of the company is not sufficient to support the amount being leased, a small down payment may be required.
6. 100% Financing
Traditional financing methods will frequently not allow soft costs such as installation, freight, maintenance, and software to be included in the loan. These must be paid directly out of working capital. A lease, on the other hand, will allow soft costs to be included, thus conserving working capital and allowing for a single monthly payment for the entire acquisition.
7. Fast And Easy
Depending on the dollar amount of the acquisition, a traditional loan may take many days and require approvals from higher levels within the financial institution. This can mean delays in getting the order placed for the much needed equipment. The credit process for a lease acquisition is generally much faster and can be as quickly as a few hours up to a couple of days. Again depending on the size of the acquisition.
8. Creativity And Flexibility
Banks are typically known for their creativity and flexibility. They are bound by the Bank Act which limits some of the things they can do to assist their client base. Leasing, on the other hand, has evolved into a method of financing which focuses on the specific requirements of the client. Payments can be structured to accommodate irregular revenue streams during the year or set up to match payback on a piece of equipment that has a quantifiable monthly savings. Leasing is the ultimate form of creative financing.
9. Purchase And Renewal Options
At one time leases were structured in such a way that the only purchase option available was the Fair Market Value of the equipment determined at the end of the lease term. Over the years, the market has made it clear that they want a better defined purchase price set out at the beginning of the lease. As a result, most leasing companies will set a mutually agreed upon end of term purchase price at the outset of the lease. This can range from $1.00 to 25% and is often reflected in the monthly payment. In addition, the purchase option can again be refinanced under a new lease contract generally over a 12 to 24 month term.
10. Conservation of Working Capital
In a recent industry survey, the number one reason for leasing equipment was discussion of working capital. By using lease financing, working capital is freed up to be used in the day to day operation of the business for things such as purchasing inventory, advertising, trade shows, and hiring employees. Essentially, leasing allows a company to reduce the amount invested in a depreciating asset, and use the money where it will generate a higher return.
11. Simplified Forecasting
Lease payments show up as an expense on the company’s income statement. Because payments are fixed and pre-determined at the outset of the lease, companies are able to intelligently forecast and budget into the future.
12. Capital Budgets To Operating Budgets
Within large organizations, capital acquisitions generally require a higher level of approval than operating expenses, and as a result take more time. A lease acquisition, being a monthly expense, will generally fall within an operating budget affording managers within various departments or business units to approve acquisitions of much needed equipment.
13. Tax Benefits
Because lease payments are treated as an expense on the income statement, the payments can generally be written off. Because each company has unique financial circumstances, and accounting firms which differ on the accounting treatment of a lease, it is suggested that the accounting firm be consulted prior to making a decision to lease on the sole basis of tax advantages.
14. Low Interest / No Interest Programs
From time to time vendors of equipment will offer time sensitive low or no interest marketing programs to help them sell slow moving inventory. It is prudent to watch for these types of programs or ask the vendor if they have any leasing incentives available.
15. Master Lease Agreements
A Master Lease Agreement is simply a document which contains all of the terms and conditions of the lease and is signed once and covers all future lease acquisitions. Generally a lease line of credit is pre-approved for a dollar amount which will accommodate anticipated acquisitions over a period of time. As equipment is acquired, a simple one page document is signed. This saves time and is effective in an expansion or a major project.
16. Preserve Bank Credit Lines
No company wants to be operating at the top of their credit line and are often reluctant to approach the bank for a credit line increase. It is prudent business practice to have funds available for unexpected events – a slow month or quarter, unpaid receivables, or an unexpected damage claim. The use of leasing creates a new credit facility without any effect on the banking relationship.
17. Hedge Against Inflation
Leasing allows for payment of in dollars, and in return pay those costs incrementally in inflated future dollars, as the equipment is used.
18. Competitive Edge
Staying ahead of the competition often requires the latest and best technology. Leasing equipment lets you do the job more efficiently, more effectively, and more economically. In addition, it provides the advantage of continuously upgrading to the latest available technology at a reasonable cost.
19. Sale And Leaseback
A Sale & Leaseback is a specialized lease transaction where the leasing company will purchase unencumbered equipment, at a fair market price from a company, and lease it back to them. It is a tremendous way of freeing up capital which is tied up in depreciated assets.
20. Enhanced Corporate Image
The vehicles in the fleet and the equipment in the production, all have an effect on the corporate image. Leasing allows assets to look new, fresh, and create the image of a successful company.
In summary, leasing came about as a means to acquire equipment and it is no wonder that many equipment manufacturers have set up their own leasing arms to help their customers acquire products in the most effective way. Leasing just makes good business sense.