How Equipment Leasing Works
Equipment leasing is a way for both business owners and consumer to leverage their capital. The business owners leverage their capital by paying for a portion of the equipment over a longer period and the consumers leverage their capital by paying a lower cost for the equipment but also having the ability to return the equipment and be relieved of the debt.
Equipment leasing is the ultimate rent vs. buy decision. Typically, the company leases a machinery and pays it off bit by bit. Leasing is excellent for businesses and organizations who can’t meet the upfront cost. Leasing is an excellent method for companies to hold on capital, pay it back little by little, and not have to worry about the up front payments.
The business owner, in leasing, is able to pay a low monthly cost, and they don’t have to make a large one-time loan to pay for the equipment. The business owner is able to sleep at night with this low payment and not worry about interest payments.
This motivates you to make your business run at it’s maximum potential because you don’t have to worry as much about extra costs or unexpected expenses.
Equipment Lease Qualifications
Before we get into the different kinds of equipment leases, we first need to lay out certain qualifications, the most important of which is that an Equipment Lease must be for equipment that is to be used in a temporary situation. In other words, it’s for equipment that will be used only on a temporary basis.
If your lease terminates and you no longer need the equipment then you have two options: either to return it to the lessor or to sell the equipment at an agreed price. The leased equipment cannot be resold for profit.
If you want to take another user of the equipment, then you need to agree terms of subleasing the equipment, which are dependent on the length of the lease and on your approval.
Let’s take a look at the different types of equipment leases:
Time or Term Leases – Also Well Known as Weekly or Weekly Rental Leases
A time lease is essentially an agreement whereby you rent the equipment for a short term period such as a week. You could refer to a time lease as a weekly rental lease, where you agree to rent out the equipment from one week to the next for only one week at a time.
In essence, the time lease is not a long term rental lease, because the moment the week is up the equipment is returned to the lessor.
Equipment Lease Rates, Costs & Terms
Equipment leasing can be a very advantageous way to lease the equipment you need to run your business. Equipment lease rates are competitive with the cost of ownership, and the financial benefits of renting are often more significant than the financial benefit of owning. In addition, there are often a set of lease terms, such as “all in” or “full coverage”, that can help your company overcome a host of obstacles, expenses and obstacles, including financial liability, insurance, and tax write-offs.
This guide will show you everything you need to know about equipment leasing. In it, we’ll go over the complete costs of equipment leases, the top reasons why you might choose leasing over other methods of purchasing, as well as the top benefits of leasing. We’ll also help you determine if leasing is a good fit for your business.
Monthly Lease Payments
Equipment leasing means that you pay for the equipment using a lease agreement. This is ideal if you want to get the lowest monthly payments and pay off the equipment faster, or if you want to finance the entire cost of the expense using a credit card or a home equity loan.
The downside to equipment leasing, however, is that you’re responsible for maintenance and any unexpected repairs that may arise. In addition, if you decide to buy the equipment in the future, you’ll likely have a lot of interest to pay back on the loan.
Equipment Lease Tax & Accounting Treatment
Before looking into equipment leasing itself, you should be familiar with equipment leasing accounting treatment in order to prepare an accurate estimate.
Equipment leasing is one of the more common types of business arrangements. For a business owner, equipment leasing presents an opportunity to expand by leasing well-priced, up-to-date office equipment. This is very beneficial for service-based businesses needing a quick, low-cost way to grow their business.
There are two main types of equipment leasing: share-based leasing and cash-based leasing. Assets are leased using one of these forms of leasing:
Share-Based Leasing …
This type of leasing is the most common. It involves the business leasing common stock to equipment manufacturers. The manufacturer leases the equipment to the business. The business can then further sublease the equipment to a third party, either informally or through an agency.
The business receives the following benefits from renting equipment to others through share-based leasing:
- Easier to scale the business…
- Ability to borrow and lent money against assets…
- Able to make lease payments with available cash…
- Interest-free or low-interest financing for leasing the equipment and prepayments…
The disadvantages of equipment leasing are:
Types of Equipment Leases
Equipment leasing involves renting equipment instead of buying it outright. This type of service makes sense when you don’t require the equipment for long. You don’t have to fork over several months’ worth of fees and payments, and you don’t have to worry about the end of the contract. This is ideal for consituent owned businesses.
For companies that don’t own big equipment, leasing is an option, but it should only be used if there’s no other way to afford the purpose of the equipment. There are various options available, and companies need to be wary of opaque or shoddy practices in the industry. And with many companies offering equipment leasing, you need to be armed with plenty of information before signing with any company.
Here are some of the types of equipment leases available for business owners to consider.
5 Types of Equipment Leases
Whether or not you’re completely aware of the concept, you can rest assured there’s a whole lot of leasing out there in the business world. Within this massive industry, there are many different types of equipment leases that can be utilized for various purposes.
In this article, we’ll introduce five of the more common leasing types you’ll encounter. We’ll also discuss how these types of leases are different from one another and look at their pros and cons.
$1 Buyout Lease
When Should I Use a $1 Buyout Lease?
10% Option Lease
An equipment lease is a contract that gives a business the right to lease a certain piece of equipment for a set amount of time to begin with, and then renew the lease multiple times.
Whether you are a large industrial business or small retail business, equipment leasing is a good way to inexpensively upgrade your equipment at the same time.
If you are looking to acquire more equipment, there are two options to consider: either do a whole new lease, or just add another 10% to the duration of the current lease. The choice depends on the size of the business. If you are a small business, you can easily handle another 10% of the duration of the current lease. If you are an industrial business, you can’t, and instead you should consider a new lease.
10% Option Lease
This is where you add 10% to the duration of the lease, at no cost. The lease will go on for 10% longer than it would have, but the business will still have a relatively short period (3 to 7 months) to decide whether to renew the lease, or sell the equipment.
Customers of equipment leasing has to realize that this is a short-term solution. However, it is often used by small sized industrial businesses who needs money fast for equipment.
When Should I Use a 10% Option Lease?
The 10% option lease is a great source of funds for many businesses. However, just because it’s available, doesn’t mean you have to use it. So when should you really opt for a 10% lease?
We’ve compiled a quick guide of common equipment leasing options, as well as when to consider going with a 10% option lease.
10% Option Lease
A 10% option lease is a great time saver when it comes to repaying your loan. With a 10% option lease, you can defer your payments from the day you pay off the full purchase price. Instead, you’ll begin making payments when your business starts making money. In the meantime, you’ll have the use of the product without making any payments. This is great for start-ups that might not be generating income when they receive the equipment. By deferring your payments, you can save the money to use for marketing, staffing, and other start-up expenses.
With a 10% option lease, you’ll have the use of the equipment, but you’ll still need to make payments for insurance and maintenance. The higher the payments are, the more likely it is that you’ll be paying off the lease over a longer period.
Many of the people who hanker for equipment leasing do so because they believe that this is the most straightforward and effective solution when leasing the equipment to the user. At FMV Ltd., we spend each day helping UK companies to take advantage of equipment leasing, both for commercial and residential use. You can read more about this here, or simply click the link below to see our range of commercial services.
All our FMV lease opportunities are available on an ongoing or a month-to-month basis with lease renewal options available at the end of each rental contract. Above all, the biggest advantage of this type of agreement can be seen in its flexibility. We essentially have an open contract with our clients, who pay a premium for our hassle free service.
Our team of experts will do everything possible to help those who are interested in equipment leasing, regardless of their level of knowledge – from the budget-conscious DIYer to the corporate ex-pat. Perhaps the most interesting feature of the lease agreement is the option to add extra equipment at minimal cost. This can then be removed or added to, based on the client’s needs.
Equipment can be leased on a month-to-month basis with renewal options at the end of the contract. Generally, the client can also opt to purchase the product, but with no upfront payments.
10% Purchase Upon Termination Lease
Most people are well aware of the 60% purchase option with a lease, but have you ever heard of a finance option where you don’t have to come up with the full amount? It’s called a 10% purchase upon lease termination, and it’s a possibility that can be used with most equipment leases.
This option has been available for many years now, but it’s rarely used, giving many consumers no information about it, and in most cases, not raising any red flags when a consumer’s tenant decides to terminate a lease sooner than expected. Many call this lease the –used car lease,” meaning it’s the lease that’s used to buy the goods instead of a full purchase. So, it’s available to be negotiated, and it’s good news for consumers.
The bigger question is if this lease is a good deal for the tenant. When the lease is terminated early and the tenant has a hard copy document as proof, the tenant can get the 10% purchase option.
Leasing is a form of financing. In the finance world, leasing is the exchange of the use of an asset for a fixed period of time. Upon the end of the lease, the asset is given back to you. Leasing offers some advantages to you, the lessee. In some cases, it may be a more profitable option than buying the asset.
There are various types of leases including discounted direct-lender origination leases, investor leases, trade-in leasebacks (TLBs), and equipment leasing companies (known as equipment lessors), as well as fully-owned leases (FOLs and FBOs).
In all case, a lease agreement is used in the final transaction in which a lessee (the company leasing) gets something of value in return for the payment of a specified amount of money over a specified period of time.
Leasing Equipment Example
Borrowing a colleague’s business phone for a few weeks is one thing, but having them borrow your equipment and return it dirty, scratched and generally not working well can be a nightmare.
While organization and cleanliness is always a good (and necessary) thing, it also well worth the small investment of leases to cover the equipment you need on an ongoing basis. It can be a financial lifesaver too.
Without the hassle of disposing of equipment that doesn’t work well, or the cost of purchasing the same items, leasing equipment could save you a considerable amount of money. But how can you really tell if leasing is the right course for your business?
It’s an investment, and an investment should be made carefully. Make sure you thoroughly research and get to know the products you are leasing.
Leasing means that you accept responsibility for the condition of the equipment and that you only use it when you plan to. Since you are signed up for a deal, the leasing company has specific terms and conditions for using the equipment, including how they expect you to fix any issues that arise.
Leasing can be an extremely cost-efficient and viable option for businesses because of the upfront capital invested. You will then pay the leasing company back for the amount of time you’ve borrowed the equipment.
Equipment Loan Alternative to Leasing Equipment
Equipment leasing is a quick and easy way to start or expand your business. Equipment leases offer you all of the benefits of buying equipment, with the simplicity of leasing. Plus, they are a great alternative to purchasing investment equipment for an existing business.
Equipment leasing is a relatively new trend, but its popularity is fast catching up to industry preferences. It has been gaining popularity, especially amongst smaller companies that don’t want to or need the capital to expand their inventory.
Equipment leasing is the leasing of equipment by a third party – a leasing company.
Unlike a bank loan, you do not have to sell any of your business assets to finance a lease. It is considered a non-credit, asset-lite financing strategy. Equipment leasing offers flexibility and tax advantages.
What are Equipment Leases?
There is a common confusion between equipment leases and equipment loans. This is because they do carry a similar structure, but there are numerous benefits to leasing over a loan.
The key difference between leasing and loan is location. With a loan, the borrower holds the equipment, meaning the equipment is included as an asset. With a lease, the equipment is held by a third party which is responsible for maintenance (service) and collection of payments.
Equipment Leasing Companies Save You Time, Money, and Effort
So you’re ready to make a move towards becoming an entrepreneur. You’ve got a great idea, you’ve started your business plan, you’ve got a website, and now it’s time to get the tools. Equipment lease companies offer these tools for entrepreneurs to help them get started on the right foot.
Every entrepreneur needs to start somewhere. This is the case whether you just want to start a home based business or you’ve always dreamed of becoming a small business owner.
Now, there are many ways to start a business, but you don’t want to waste your time doing the wrong thing and stalling your growth. One of the most beneficial ways to begin your business is through equipment leasing because it’s a simple way to get started in the world of business and yet it gives you lots of options for growth and expansion.