A comprehensive guide to leasing equipment for your business

Find out if leasing equipment is the right option for you and your business with this helpful guide.

16 December 2019

For many small business owners, buying and maintaining equipment is out of the question. The expense, investment and upkeep, coupled with near-constant upgrades and versions, makes leasing equipment an attractive alternative. That said, some small business owners can be sceptical about this form of equipment procurement due to reduced ownership.

This in-depth guide provides everything you need to know about the equipment leasing process, helping you discover both the benefits and drawbacks of leasing, how to go about the process and whether or not it’s right for your business.

 

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What is equipment leasing?

 

Equipment leasing allows companies to lease or rent equipment without the significant cost of buying new. Much like renting premises, leaseholders pay a monthly fee for a set period. When the lease is up, you may have the option to purchase the equipment outright, extend your lease or go for an upgrade.

And though hiring and purchasing equipment might seem similar, there are a few important distinctions to be made. When your leasing contract ends, you don’t automatically gain ownership of the leased equipment, although you may be offered the option to purchase it, renew your lease or upgrade.

With hire purchases, you pay an initial deposit followed by set monthly instalments. Once your balance is paid in full, you will own the equipment outright.

It’s important to note that your lease agreement is likely to be with a third-party service and not provided directly by the equipment supplier.

woman pressing buttons

 

How does equipment leasing work?

 

There are a wide variety of equipment leasing options, each with their own different ways of working.

Operating lease agreements

If a business chooses to go with an operating lease, they’re allowed to use the given equipment, but they aren’t provided with any ownership rights. Typically, these belong to the leasing company or financial institution.

 

Lease-purchase agreements

A lease-purchase agreement, another example of an equipment lease contract, involves the business leasing the equipment entering into a pledge to buy the equipment once the term ends. Another alternative, known as a lease option, gives businesses the choice to buy the equipment either during the lease period or at the end of it.

 

Open-end and closed-end agreements

Then there are open-end and closed-end leasing agreements. With the latter, no money is obligated when the lease period ends. Thus, equipment can be given back without incurring additional costs.

An open-end lease, on the other hand, involves small monthly payments that end with a much larger “balloon payment” when the lease period ends. While this means a business can maintain its cash flow, the final payment may be more than if they’d bought the equipment outright.

 

What kind of equipment can be leased?

 

Almost everything you need for your business can be leased. Products vary per company, but most leasing companies will offer leasing arrangements on various pieces of equipment, ranging from coffee machines and IT equipment to rolling roads and industrial washing machines.

Leasing can be a safer option of acquiring high-risk equipment that is likely to need regular repairs. Depending on your agreement, your leasing company may also pay for general maintenance. Equipment leasing is not for everyone, but it can be beneficial for small businesses looking to get started, as well as for larger companies to keep up with new technologies without a significant cash outlay.

 

What are the pros and cons of leasing equipment?

 

So how does equipment leasing stack up in comparison to purchasing? While there are undoubtedly many plus points that can serve small businesses well, it’s also worth noting some of the drawbacks before you go through with the process.

 

The pros of leasing equipment

 

  • Upfront Cost – Leasing requires no initial outlay, so you won’t need to dig into your working capital or take out a loan.
  • Financial planning – Leasing allows you to plan for the future because you already know what your equipment costs will be and interest rates are generally fixed for the term of your contract.
  • Tax-deductible – The cost of your lease can be deducted as a business expense.
  • Affordable upgrades – It’s easier to keep up with the latest innovations in your field for a small adjustment to your monthly payments, rather than shelling out upfront for new technology (upgrading can also be a drawback, see below).
  • Breakdown cover – Your leasing company will cover breakdowns and repairs.
  • Hassle-free credit – It's generally easier to get approved for a leasing agreement than a bank loan.

 

Leasing options offered by equipment suppliers could actually be the best deal. Because companies want to maximise the sales of their equipment, the rate offered by their leasing partner could be more competitive than you think.

If you’re a small or medium business owner, equipment leasing could be the cash-flow-friendly solution you need to keep your tech up to date and your company relevant. Just be sure to check that it will be cost-effective for your business and shop around for the best deal.


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The cons of leasing equipment

 

  • Price premium – The total cost of leasing the equipment will probably be higher than the cost of buying outright.
  • Ownership – You don’t own the equipment at the end of your contract, although you might have the option to purchase it.
  • Personal credit – Small business owners may be required to use their personal credit to secure the lease.
  • Long term contracts – In most cases, you’ll be locked into a contract which you’ll have to continue paying for, even if you no longer need the equipment.
  • Cost of upgrading – If you do need to upgrade, you won’t be in a great position to negotiate. If you think your equipment might be outdated before your lease is up, make sure you’re aware of your upgrade options beforehand or you could end up stuck with outdated equipment.

 

How to lease equipment

 

Before you go ahead with an equipment lease, consider the following:

  • How often will this equipment be used? Make sure your new investment will be worthwhile.

 

  • Is it cheaper to lease? Take a careful look at your books and compare the outright buying price with the total cost of your lease agreement. Remember, you won’t own the equipment at the end of your lease. It may be more cost-effective to buy equipment outright or to consider looking at other lines of credit.

 

  • What will be the return on investment? Refer to your business plan and work out how much this piece of equipment will earn you in net profit against your leasing costs.

 

  • What are the maintenance costs? Although your leasing company may cover breakdowns and repairs, in most cases the business owner is responsible for general maintenance. Do your research in person and online by visiting professionals and searching forums. Even if you are familiar with this type of equipment, the brand or model which you are looking at might have a reputation for being high maintenance.

 

moving equipment

 

How to choose an equipment-leasing company

 

Equipment lease providers differ in type, rates and benefits, so it’s essential to compare what’s out there so you can find a company that’s right for you and your business. There are three different types of provider which are as follows:

  • Lease broker: An intermediary between you and any prospective lessors, the broker will present you with offers and submit your requests for financing, so much of the paperwork is handled for you. Though their services don’t come cheap, they specialise in a wider range of equipment than others, often at a better price than those available through standard channels.

 

  • Leasing company: The subsidiary leasing arm of a manufacturer or dealer, a leasing company’s sole aim is to facilitate leases with its parent company or dealer network. Typically, businesses only deal with a leasing company when working directly with a manufacturer.

 

  • Independent lessor: Third-party lease providers, independent lessors provide equipment leases directly to a business. They differ from leasing companies in that they typically specialise in the remarketing of equipment, a skill that enables them to group products from multiple manufacturers and offer more competitive APRs.

 

Questions to ask a dealer

 

After you’ve collected price quotes from at least three companies, it’s a good idea to enquire further by asking them the following questions.

 

  • How much money is required upfront? Lease financing often provides 100% of the dues required for an equipment purchase, while loans don’t, often requiring up to 20% of the total as a down payment. If a down payment is required, then you may need to reassign capital to cover any upfront costs.

 

  • Who takes advantage of the tax incentive? Under a loan structure, a business can claim depreciation. However, they’ll also have to provide a down payment, and the interest rate is higher. Under a lease, the leaser claims depreciation in exchange for a lower APR – often half that of a loan. If deprecation credit is important to your business and you still want to lease, ask about the availability of finance o capital leases.

 

  • Are the financing terms flexible? Compared to loans, leasing is viewed as the most flexible financing option. Depending on the structure of the lease, you can start with low payments and increase them as time goes by (known as a “step-up lease”), defer payments and even add more equipment onto an existing lease under a “master lease” structure.

 

Gazprom Energy is a leading and award-winning business energy supplier, helping thousands of small businesses manage their gas and electricity contracts. To find out more about what we can offer your business, visit the homepage or call us today on 0161 837 3395.

The views, opinions and positions expressed within this article are those of our third-party content providers alone and do not represent those of Gazprom Energy. The accuracy, completeness and validity of any statements made within this article are not guaranteed. Gazprom Energy accepts no liability for any errors, omissions or representations.


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