Equipment leasing is when a business leases its equipment as opposed to purchasing the equipment outright. Equipment leasing can make sense in many scenarios, and this article will provide information to help you decide if you should lease or purchase equipment for your business.
1. Equipment leasing – Info
2. Who leases?
3. Why leasing instead of buying?
4. What can you lease?
5. Qualifying to lease
6. Finding the right leasing company
7. Types of leases
8. Obligations of the lessor and lessee
9. Buying previously-leased equipment
1. Equipment Leasing – Info
Equipment Leasing is very common among small businesses. In fact, statistics show that over eighty percent of small businesses lease most of their business equipment. Small businesses as well as individuals lease equipment for several different reasons, and almost always for less than £50,000 per year. Although large businesses and corporations can lease equipment that sometimes runs in the millions each year, there is a very large market for much less expensive Equipment Leasing.
Leasing business or personal equipment makes sense in a lot of cases, and can save businesses and individuals a tremendous amount of money in the right situations. Obviously, leasing does work in quite a few cases, because the equipment leasing business has been strong for many years, and continues to remain so. Banks, which have in past years tended to stay away from the leasing business, are now reconsidering this potentially profitable enterprise. Though not all banks have jumped on the bandwagon yet, more are more are starting to each year.
Some owners of new small businesses who are just starting to build their business equipment inventories are new to leasing. They need to learn the ins and outs of leasing, as well as the reasons why leasing may be better than buying their business equipment outright. Business and personal equipment leasing is more than just making a phone call, choosing the equipment, and signing the papers. There is a certain amount of research that needs to be done, and all contracts and legal issues need to be investigated carefully.
2. Who Leases?
The kinds of businesses and individuals that lease equipment for under 50K per year can vary widely. First of all, there are individuals. These can be people who have hobbies that require having heavy equipment for certain periods of time, such as those who restore antique automobiles or are working on major home remodeling projects. Leasing equipment to individuals makes up just a small percentage of the profit for leasing companies, however. Most major leasing companies focus on businesses, and for many of these companies, this is their sole focus.
Equipment leasing under 50K per year is almost always done by small businesses. These can include such businesses as accountants, solicitors, manufacturers, building contractors, small electronic companies, temp agencies, small newspaper publications, or restaurants. Many times, especially when a small business is fairly new, it makes more sense to at least start out leasing business equipment. However, a new business may not get sufficient credit points to be offered leasing but may be accepted if the owners take personal responsibility for the lease payments. Sometimes new small business owners want to see how things will pan out for their new enterprise for a certain period of time before they invest large sums of capital. In this case, leasing makes a lot of sense, not only while waiting to see if a business will be successful, but also seeing if the type of equipment initially acquired needs to be changed to something different. Being cautious, however, is not always the reason for leasing, as many small businesses continue to lease their equipment for many years.
3. Why Leasing Instead of Buying?
What is the actual advantage of Equipment Leasing instead of buying it? There can be several reasons. Many small businesses have to watch their overhead, as they usually have a tight budget to work with, especially when just starting out. Although comparing buying business equipment to leasing business equipment is always the prudent thing to do, most small businesses find that leasing will save them money – in the short and the long run. Some business equipment is an investment only in the fact that it helps a business run efficiently and become successful. Just like a car, however, the value of many types of business equipment will begin to depreciate the moment they are purchased. This is partly due, of course, to simple wear and tear. It is also due, though, to technology. Some business equipment can be updated up to a certain point, but there will come the time when it will be rendered almost obsolete by technological progress. Unfortunately, this can often happen before the equipment has reached the end of its normal life span. Having to replace business equipment is costly, and becomes even more costly when a business cannot sell or trade in their old equipment for anywhere near a reasonable price.
Leasing, however, can help small businesses avoid this problem. Businesses that need production machinery or technical office equipment can benefit from leasing. For one thing, leasing seldom requires a down payment, and leasing payments are generally lower than mortgage-type payments. This is because they are not usually subject to high interest payments, and are usually spread over longer periods of time. Leased equipment can be updated on a regular basis as needed, and the old equipment can simply be returned to the leasing company, making it a simple and efficient process.
4. What Can You lease?
There is very little that can’t be leased. When it comes to small businesses, or even large businesses looking to lease a small amount of equipment there are certain things items that are leased more than others. Large ticket items such as airplanes or helicopters are often leased by large companies, and sometimes leased by small companies as well. When it comes to these types of large ticket items, leasing can be a very good idea. Sometimes maintenance and repairs can be included in the cost of leasing and still be less than the cost of mortgaging.
Most of the time when it comes to small businesses, leasing usually pertains to office equipment, vending equipment or heavy machinery. The office equipment can be anything from cubicles and desks to coffee machines and water dispensers, computers, fax machines and copy machines. Especially in an office atmosphere, business equipment such as vending, computers, fax machines and telecommunication equipment needs to be replaced on a fairly regular basis due to technological advances or staff changes. A business that is using outdated computers has very little chance of keeping up in a competitive market. Too much or too little vending can be counter-productive.
Businesses such as contracting companies or farms will lease heavy equipment. A small contracting business will lease industrial woodworking and metal working equipment or cement mixing equipment, and a farmer may lease equipment such as tractors, hay tenders and elevators, or sickle mowers.
Many businesses lease their company cars; a practice that makes sense when you consider how quickly car values depreciate. Businesses that lease their company cars often update the vehicles each year, or once every two years.
Vending for many reasons has always been the leased equipment of choice. Few businesses feel the need to own vending equipment depreciating year by year when they can keep state of the art food and drink vending working efficiently in the workplace for tine amounts of money paid quarterly or monthly.
5. Qualifying to Lease
Just like when someone is trying to lease an apartment or a car, there are several factors that come into play when a small business is trying to rent equipment. First of all, if the owner of the business has had financial trouble before, including late lease or mortgage payments or defaults, that may not bode well for a future leasing attempt. The business owners’ and the business’ credit history is going to be taken into consideration – and there is no getting around that. A history that shows some bad credit situations does not necessarily have to be the end of the road. Leasing companies will look at the overall credit history, and if there is only one bad instance, they will probably ask if there were any extenuating circumstances. If a business owner or business that is looking to lease knows that there will be some problem with the credit history, it is sometimes a good idea to be ready with answers when the obvious questions will be asked.
There needs to be some reassurance that the money will be there for the monthly, quarterly, or yearly lease payments. A financial statement is necessary before even attempting to negotiate a leasing contract and end of the year accounts will be reviewed before leasing is offered to a limited company. Leasing companies are going to go with customers that they are reasonably sure will live up to their obligations. If there is a business history, that will be taken into consideration also. Someone who has had repeated business failures may not be looked upon favourably.
When searching for a good leasing contract, business owners and businesses need to be armed with the paperwork and answers that will get them what they need.
7. Types of leases
A business that will be leasing office or vending equipment is most likely going to go for what is called an “operating lease”. An operating lease is generally a fairly short-term lease, and is used to cover equipment that needs to be updated on a regular basis. Computers, vending, fax machines, and telemarketing phone equipment generally fall into this category. With today’s progressive technology, computers tend to become outdated very quickly, usually within two years at the most, and must be replaced with more advanced models. Equipment such as fax machines, copy machines, and telephone equipment will probably last a bit longer, but not as long as other types of equipment such as vending equipment. Operating leases often do not last long enough for the payments to cover the cost of the equipment being leased, and this will figure into the financial arrangements of the leasing contract.
Business equipment that will better stand up to the test of time is usually leased in the form of a “finance lease”. When business equipment is under a finance lease, the lease payments tend to cover the cost of entire cost of the equipment over its term. Some finance leases have a clause that allows businesses the option of buying the equipment at the end of lease term for a drastically reduced price. Finance leasing is almost always the best idea when the same equipment will be used for a long period of time, say five years or longer. Finance leases are almost exclusively long term leases, unless the business doing the leasing opts for higher payments for a shorter period of time.
Whichever type of lease that a business will end up going with is usually obvious to everyone involved; it is simply a matter the type of equipment needed. There are also several sub-categories of each type of lease.
8. Obligations of the lessor and lessee
The lessor’s obligation when it comes to leased equipment can often depend on the fine print in the contract. In some leasing contracts, the lessor is completely responsible for the leased equipment. This includes routine maintenance, repairs, taxes, and the insurance that will cover the equipment. This is quite common with an operating lease. Other lease contracts will hold the lessee responsible for all maintenance, repairs, insurance, and taxes on the leased equipment. This is most often found in the finance lease, as the equipment will most likely be with the lessee business for quite a long time.
When a business leases their company vehicle it is a finance lease, and the lessee company is responsible for insuring, repairing, and maintaining the vehicles. This is true of individuals that lease cars, also. With automobiles, this is the standard way of doing business. When it comes to business equipment, however, the obligations of the lessor and the obligations of the lessee can definitely be up for negotiation, and are obviously key points in the contract.
When small business owners lease equipment, they need to consider the difficulty of maintaining the equipment, or the cost of repairing the equipment should the need arise. Also, they need to consider how delicate the equipment is. Telephone equipment tends to be dependable, and businesses can be fairly sure that it will not need costly maintenance or repair. Copy machines, however, tend to need maintenance or repair on a regular basis, no matter how new they are. Considering the equipment and the cost of maintenance or repair should definitely figure into the type of lease contract that the lessor and the lessee sign. Once again, the lessee should be as knowledgeable as possible about the type of equipment that is being leased before signing a contract.
9. Buying previously-leased equipment
Previously leased equipment is, obviously, used equipment, and can usually be purchased for a low price. In many leasing contracts, the lessee will have the option to buy the leased equipment at the end of the lease contract. If it is equipment that can stand the test of time, such as farm machinery or industrial tools, this can be a good idea. If it is equipment that becomes obsolete quickly, such as computers or vending machines, most businesses will decline the option to buy.
Previously leased equipment does not always have to be sold to the lessee, however. Many used vehicle are not actually previously owned, but previously leased. Even outdated computers can still be good for many tasks, and can be bought for a bargain. When looking for a bargain on previously leased equipment, it is best to go to the source. This is why UK Vending Ltd operates its own refurbished, pre-loved vending machine website http://www.vendagain.co.uk.
(Martin Button is the Managing Director of UKV Solutions Ltd incorporating UK Vending (Britain’s longest serving vending business), UKV Finance (underwriting sales aid leasing across a vast range of product groups in the UK and Ireland), UKV Corporate Solutions (software development and distribution), UKV Solar (providing Green Energy solutions to businesses through unique financing packages) and UKV Office Perfect (nationally providing reprographics technology including printing, photocopying, MFPs and SFPs and integrated server based and in-cloud software).
HOW TO LEASE BUSINESS EQUIPMENT