If you’re a growing business, chances are at some stage you might need additional equipment. Whether you’re launching a new product line, offering a new service or simply seeing an increase in demand, sometimes the equipment you already have just won’t cut it.
If you need additional equipment but don’t have the capital to purchase it upfront, equipment leasing could be for you. If you’re wondering if equipment leasing programs would be right for your business, read on.
In short, equipment leasing is a type of financing in which the business will rent the equipment for a while rather than owning it outright. This can be beneficial for smaller businesses that lack the cash to purchase new equipment upfront.
However, equipment leasing isn’t to be confused with equipment financing. Equipment leasing allows you to borrow equipment for a specified period. Once your lease is up, you won’t own the equipment.
Equipment financing is a way to pay for equipment over a longer period, such as taking out a business loan to cover the cost of ownership.
Equipment leasing is an easy way for start-ups and SMEs to get the benefits of using the equipment without the risks associated with ownership.
Equipment leasing works by allowing businesses to pay a fee each month, in exchange for use of the asset.
When it comes to equipment leasing, it’s not just machinery that can be leased. You can also lease things such as cars, computers and any other tools that are necessary for your business to expand. You may be surprised to find out that even the less obvious office supplies can be leased – think office chairs, coffee machines or printers.
If you need some business equipment, chances are you can lease it.
If you’re looking for an alternative way to finance business equipment, we’ve broken down the most popular three leasing options below.
A finance leasing option is popular for businesses that need equipment but want to keep things as low-risk as possible i.e. if you’re a start-up or small business. In a finance lease, the lender will purchase the equipment outright. You’ll then pay for the equipment in pre-agreed instalments.
With finance leasing, the assets will belong to the lender, but you’ll be able to use them as if you purchased them outright.
Another popular option is hire purchase leasing. This is like equipment leasing in that the equipment cost is spread over a longer period. However, unlike finance leasing, the payments will go towards the cost of the equipment.
A contract hire agreement is like renting equipment. This is usually the preferred option if you need equipment for a shorter period. With a contract hire agreement, you can use the equipment for a specified time and purpose. After that, the equipment is returned to the owner, who can then sell it on.
In other words: there isn’t an option to own or buy it after your contract ends.
Renting and leasing equipment are often used interchangeably, but there are some differences. Equipment leasing is generally carried out over longer periods and is, therefore, less flexible as businesses are tied into longer contracts.
Equipment renting is a more flexible option as it’s typically done over shorter periods. As such, you’ll usually pay a premium for the additional flexibility.
If you’re wondering how to lease equipment, you’ll be pleased to hear it’s relatively straightforward. You simply have to:
If you’re considering going down the leasing route, you’ll first need to fill out an application form. You’ll need to have financial data to hand for this.
The lessor should let you know within 24-48 hours whether your application has been successful. It’s not uncommon for the lessor to request a business plan at this stage, so they can see how you plan to use this equipment as part of your ongoing business growth.
Once your application has been approved, you’ll want to look over the terms of the equipment lease and decide on the final structure. You should consider the monthly payment amounts and fixed APR. Once you’re happy, you can sign on the dotted line and proceed to make the initial payment.
Once the lessor has accepted your countersigned documents, the lease will be in effect.
You’ll then need to arrange when the equipment will be delivered.
Congratulations, you’ve got your hands on the equipment you need! However, it’s important to remember that the equipment doesn’t belong to you. Yet, as it’s now in your hands, you’ll be responsible for it on a daily basis.
As part of your equipment lease agreement, it’s your responsibility to take care of the equipment. This includes protecting it from excessive wear and tear and conducting regular maintenance if required.
As well as this, you’ll typically also be responsible for:
If you’re considering leasing your equipment, you’ll need to factor these ‘hidden’ costs into your budget.
Although leasing is popular with many businesses as it requires a lower initial outlay, it’s not the only benefit. Some other reasons to consider equipment leasing are:
As well as requiring less initial outlay, equipment leasing can help with cash flow and budgeting. With a commercial equipment lease, you’ll pay for the equipment over a set period of months or years. Therefore, you’ll know exactly how much you’ll be spending each month on that piece of machinery, printer or whatever else you have chosen to lease.
You’re thus able to budget better and enjoy cash flow benefits.
Rather than scrimping and saving for the latest equipment, leasing is an easy way to get your hands on what you need fast.
You may also be able to afford better equipment than you would if you were to buy it outright.
While it will vary in each lease, some lenders will pay for repairs. For example, with contract hire vehicles, the equipment leasing finance company will often pay for repairs. Should you experience an unexpected hiccup with your equipment, you won’t have to fork out for it.
However, you should always check your equipment lease terms.
As you won’t own the equipment, it won’t appear on your balance sheet. Although this may not be a benefit if you come to apply for finance in the future, it is tax efficient.
If the equipment you use is frequently being updated, leasing can be a great option. Rather than buying a new piece of kit every time a new model comes out, by leasing you can quickly and easily upgrade your equipment without having to buy it new. You’ll likely just have to adjust your monthly fee.
Or, if you just like having the latest car then it makes sense to lease.
Although equipment leasing can be a great option for your business, it’s not always the case.
If you’re a small business considering leasing equipment, there are some downsides. These include:
If you want to lease equipment, you must be VAT registered. Although many businesses are, if you are generally cash in hand then leasing may not be an option.
As leases work on a fixed APR, if you’re not careful you may end up paying more for your equipment. If you don’t want to lease, there are other finance options available.
While you will be paying for the equipment, at the end of the lease you won’t own it. Therefore, if you choose to apply for funding later down the line it cannot be used as collateral. If you own the equipment outright, you can use it as an asset in the event you cannot pay back a loan.
Even if you are strapped for cash, you may still have to put down a hefty deposit or make payments in advance.
Although leasing is less risky, it does tie you into an agreement for several months or years. With no way of knowing your future financial situation, you could end up being locked into agreements you can no longer afford. They may also be hard to terminate.
If you’re a start-up or small business experiencing growth, then yes – it probably is. But it’s not the only way. There are various alternative finance options out there for businesses struggling to stump up the cash to buy the latest high-tech equipment.
If you’re wondering if equipment leasing is right for you, get in touch and speak to one of our friendly experts. With years of experience helping businesses, we’ll be happy to discuss the best funding options for your business.
5 August, 2022