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Why do businesses lease equipment?
With a lease, you can bring new equipment into your business such as office furniture, computers, copy machines, and construction vehicles, without having to allocate much of your available cash flow. Equipment leasing gives you the flexibility to use your funds to grow your business in other areas.
For the most part, there are many similarities between the various types of equipment that companies allow you to lease. It's typically an expensive purchase (at least $5,000), a physical product, and something that can be repossessed if payments aren't made on time.
Businesses that lease equipment are privy to distinct advantages that make it a worthwhile investment. Among them:
- Small initial investment: While you still must come up with some cash for application and set up fees, it's still significantly less than a large equipment purchase or the costs of securing a bank loan.
- Never fall behind the times: Since some leasing terms can be for just a year or two, you'll be able to upgrade to better equipment on a regular basis.
- Tax privileges: Some types of leases allow you to deduct all payments towards the lease as a business expense.
- Improves business cash flow: By not paying a large sum of money up front for your equipment, you can keep more cash in-house to reallocate towards other areas of the business.
- Better financing options: Don't need a lengthy (or strong) financial history to get a lease. This is very important for the newest of businesses that might be very credit worthy, but haven't been around long enough to establish themselves.
- Latest and greatest: By leasing equipment, you don't have to worry about equipment obsolescence – you get the most modern equipment right away!
- Increased purchasing power: Use your resources more effectively to get high-quality equipment and furniture you may not be able to afford outright.
- Potential tax breaks: With some leasing agreements, you can write-off lease (always check with your accountant first before taking any assumed tax credits.)
Leasing drawbacks
These benefits may sound great – and they are! But as with any other major purchase, you also have to keep in mind the potential downsides.
The first is that you'll pay considerably more for the equipment over time because of the interest payments. And you can get the tax benefits, but only if you don't plan on owning the equipment outright at the end of term.
Another disadvantage is if you decide at some point that you no longer want to lease the item. Say you either find one at a great price, or your company doesn't need it anymore. Unless it's specifically written that you can opt-out of a lease agreement, you may have to pay significant penalties to the lender if you break it.