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Equipment is expensive, and it may be impossible for many small businesses to buy everything they need upfront. Equipment leasing is a way to spread the costs over a set amount of time.
You may not own the equipment when you lease, but you don’t have to worry about your equipment becoming obsolete.
With equipment leasing, you pay a fixed rate over a specific period. The interest and fees are built into the payment. Equipment leasing contracts typically run for three, seven or 10 years.
Considering Leasing?
Buying and maintaining equipment is expensive, and as soon as you invest in a piece of machinery, it’s only a matter of time before a new version comes out – making yours obsolete or inferior. Because of the high costs of owning and operating equipment, many small business owners opt to lease.
Leasing offers advantages that owning does not, including lower monthly payments typically spread over months or years rather than delivered in a lump sum. Many commercial equipment leases also include service agreements or service add-ons, which offer peace of mind for business users and negate the need for in-house technicians.
If your business needs new equipment or technology, but you can’t afford it, leasing may be an option to consider. Leasing lets you make smaller monthly payments – typically over a multiyear period – instead of buying something all at once. At the end of the lease, you may return the equipment or buy it for a price that factors in appreciation and how much you paid over the life of the lease.
Equipment leasing is a type of financing in which you rent equipment rather than purchase it outright. You can lease expensive equipment for your business, such as machinery, vehicles or computers. The equipment is leased for a specific period; once the contract is up, you may return the equipment, renew the lease or buy it.
Equipment leasing is different from equipment financing – taking out a business loan to purchase the equipment and paying it off over a fixed term with the equipment as collateral. In that case, you own the equipment once you pay off the loan.
With an equipment lease, the equipment isn’t yours to keep once the leasing term is over. As with a business loan, you pay interest and fees when leasing equipment and they’re usually added into the monthly payment. There may be extra fees for insurance, maintenance and repairs.
Equipment leasing can be much more expensive in the long term than purchasing equipment outright, but for cash-strapped small business owners, it’s a means to access necessary equipment quickly.
If you decide to lease equipment for your business rather than purchase it upfront, you enter into a lease agreement with the equipment owner or vendor. Similar to how a regular rental agreement works, the equipment owner drafts an agreement, laying out how long you’ll lease the equipment and how much you’ll pay each month.
During the lease term, you use the equipment until the deal expires. There are cases in which you can break the lease – and these instances should be spelled out in the contract – but many leases cannot be canceled. Once the lease is up, you can often purchase the equipment at the current market rate or lower, depending on the vendor.
Leasing equipment offers many benefits to cash-strapped small businesses. While not all equipment leases are the same, and there are many ways to finance a lease, here are some advantages to leasing your equipment:
It’s cost-effective to get started. Many lessors don’t require a significant down payment.
You can update your equipment. If you often need to update equipment, leasing is a good option because you aren’t stuck with obsolete tools.
It’s easier to scale. If you need to upgrade to more advanced equipment to handle a higher work volume, you can do so without selling your existing machinery and shopping for replacements.
While many companies benefit from equipment leasing, an outright purchase is more cost-effective in some instances. When comparing purchasing and leasing options, consider these factors:
A lease is ideal for equipment that routinely needs upgrading – for instance, computers and other electronic devices. Leasing gives you the freedom to obtain the latest machinery with a low upfront cost, plus with a fixed rate you’ll have monthly payments you can budget.
At the same time, leasing provides a wider range of equipment options for businesses. Leasing makes it financially possible for you to afford equipment that would otherwise be too costly to purchase.
Leasing requires that you pay interest, which adds to the overall cost of the machine over time. Sometimes, leasing can be more expensive than purchasing the equipment outright – especially if you purchase the equipment when the lease term has expired.
Additionally, some lenders enforce a certain term length and mandatory service packages. This can add to the overall cost if the lease term extends beyond how long you need the equipment. In this scenario, you could get stuck with a monthly payment and storage costs associated with unused equipment.
When you own a piece of equipment, you can modify it to suit your exact needs. This isn’t always the case with a lease. Similarly, buyers aren’t bound by the limitations an equipment lessor imposes.
Purchases also enable you to resolve any issues more promptly because you don’t have to obtain approval from the leasing company to schedule a repair or order a replacement part. In addition to the depreciation tax benefits available through Section 179, you can recoup some money by reselling the equipment when you no longer need it.
Like leasing, purchasing has its drawbacks. The biggest is obsolescence; with a purchase, you’re stuck with outdated machinery until you buy new equipment. Also, market competitiveness and the availability of tax incentives with leasing are often enough to dissuade many business owners from purchasing equipment outright. The costs to maintain and repair machinery, plus a steep purchase price, may put too much of a financial strain on your company.
By some estimates, businesses budget 1% to 3% of sales for maintenance costs. This is a rough estimate, though. The equipment, service hours, ages, quality and warranty determine the actual maintenance costs.