Businesses have several options when they need to acquire new equipment. One of these options is to lease the gear from their original owner. Lease refers to a long-term “rent” agreement between a small business and another enterprise that owns the hardware that the former needs.
Small business equipment leasing is the polar opposite of purchasing. You don’t, by default, gain ownership of the tools you’ve leased when the terms expire. However, negotiations can arrange a buy option at the end of the lease. In 3 out of 4 leasing arrangements, ownership is an option that the lessee can exercise. There’s even a contract type that mandates the purchase after the agreement concludes!
There are various benefits that a small business can get out of leasing equipment instead of buying through a business loan. To reap these benefits, all you have to do to follow the five tips below for leasing small business equipment.
Tip 1 – Know What You Need
Your first step is to take inventory of what you have, what you don’t have, and what you need. Lease contract terms could become expensive if you lease equipment that you don’t need.
One crucial step you should take is to check all of your equipment to identify which ones can still be restored to working condition and which ones are too expensive to maintain or fix. It will be cheaper to lease new equipment in the long run if the old ones keep breaking down and requiring repair. Exclude from your lease those gears that are still relatively new and do not require frequent maintenance.
You should also evaluate your workflows and see if acquiring additional equipment can improve efficiency. Identify what that hardware is, and add them to the list.
Tip 2 – Forecast the Financial Effects of the Lease on Your Business
Lenders are interested in how your business will be affected by your leasing of new equipment. They’d want to know if the lease will result in more profits and savings for your company. Fewer expenses and more income mean you’re in the right shape to pay off your lease obligations. These are two indicators that lessors look at when reviewing applications. Get together with your accountant and organize your balance sheets.
Tip 3 – Look for the Right Lessor
There are numerous lessors in the market, but only one of them is the ideal fit for you. Take the time to get to know each of your options. Your goal is to find the right one that caters to small businesses like yours. This ensures that you get favorable terms and that you have higher chances of approval.
Caution – don’t submit numerous lease applications at once. Finance institutions have ways of finding out if you have applied for a lease from more than one of them. It raises red flags and could result in rejection.
Here’s another tip. Consider applying for packaged leases if you’re planning to rent multiple utilities. This is more economical for your business than getting a lease for each piece of hardware that you need.
Tip 4 – Learn About the Different Buyout Options
As mentioned earlier, lease providers will generally provide you with buyout options that you can exercise at the end of the arrangement. Learn about these even if you are not interested in ownership for now.
There are four types of buyout options for equipment leasing. These are, namely:
- $1 buyout. You can purchase the equipment for $1 at the end of the lease. This is perfect for equipment that doesn’t become obsolete quickly.
- Fair market value. This option lets you buy the gear for its market value by the time the lease ends.
- 10% option. You can gain ownership of the machinery by simply paying 10% of their assessed value at the end of the lease.
- 10% PUT option. This is just the option stated above, but the purchase becomes mandatory and not optional.
Take time as well to understand operating and capital leases.
The capital lease is a long-term agreement, at the end of which the equipment is automatically transferred to the lessee. The lessee is expected to shoulder all insurance, taxes, and maintenance expenses on the leased assets.
The leased machines are considered assets in the lessee’s balance sheet, while the monthly lease payments are declared expenses. As a result, the lessee can claim deductions on both asset depreciation and interest expense.
On the other hand, operating leases don’t transfer any rights to the lessee, except for using the equipment. They are expected to pay for maintenance, but not insurance nor taxes. The lessee’s tax benefits are limited only to the monthly lease payments as well. Operating leases also include clauses for optional buyouts, but ownership generally reverts to the owner after the lease concludes.
Tip 5 – Review Your Credit Records
Take time to ascertain your credit records and request a copy of your personal and business credit records. Look through them to see if there are errors that could’ve brought down your scores and rectify them. Make sure to call your lenders and have them report transactions that were otherwise not submitted to the credit bureaus.
You should also check your credit scores because providers expect owners to guarantee the lease. Owners, in this context, are those who have a stake of at least 10% in the business. This means that each owner’s credit score can influence the lessor’s decision to approve the lease application and calculate the lease terms.
Consider this as an opportunity to ascertain both your personal and business credit standing. You don’t want errors to appear on your credit profile. They can reduce your ability to secure financing, which is unfair if you’ve faithfully settled your obligations.
Businesses that need to acquire new equipment to keep up their operations can choose to lease them instead of getting financing for a purchase. If they don’t plan on gaining ownership of the hardware in the long term, equipment leasing is the way to go.
Finding the right lease arrangement is an art form. Entrepreneurs need to understand how they can find the right lease offer from a provider and how they can raise their chances of approval. Furthermore, they should also understand what a lease is, how it works, and their options. This knowledge will help them make an educated decision that can make or break the business.