WHAT IS EQUIPMENT LEASING?
Simply put, equipment leasing is an alternative means of financing an asset for a business. A key difference between leasing and financing is that the leasing company retains the title to the equipment during the term of the lease.
Think of your own experience the last time you financed an appliance, furniture for your home or a car. You selected the item you wished to purchase, you entered into a finance agreement, the bank or finance company paid the seller for the item, & then you made payments to the bank or finance company until you owned it.
With equipment leasing, we have the same process-- except the leasing company owns the equipment.--- Based on an arrangement made prior to the start of the lease, the purchase price at lease end might be one dollar......or it might be a pre-set fixed option such as 10% of the equipment's original value......or the equipment's fair market value.
WHY SHOULDN'T A COMPANY JUST BUY EQUIPMENT?
Even for those companies that are fortunate enough to have ready liquidity to purchase the equipment outright, this may not be a prudent decision. This business axiom holds true " If it appreciates, buy it. If it depreciates, lease it." ---often it's Tax benefits yield more annual cash flow than if the company were to buy the same equipment and depreciate it following IRS guidelines.
Why Shouldn't A Company Borrow From A Bank Instead?
Banks traditionally require a company to come up with significant down payments before they will consider a financing request. Additionally, banks are reluctant to finance a non-real estate asset beyond one year, and almost certainly not over three years.--- Banks often require a personal guarantee by the business owner's spouse. They frequently demand a "blanket lien" on all the business assets (as opposed to a leasing company which is usually just interested in the equipment itself.) Plus, banks often insist on promises from the borrower that he will not incur additional indebtedness beyond a specified amount.
What can be Leased?
Virtually any capital asset can be leased. The list is seemingly endless. From computers to office machines...from restaurant equipment to hotel furnishings... from machine tools to sewing machines... from trucks to trailers and airplanes. Even software can be leased.
Why Lease?
Leasing first gained popularity in the 70's as a way for sizable companies to acquire expensive machinery and mainframe computer systems-- with tax benefits for both the end-users and the leasing companies. Today, businesses of all sizes, from mom-and-pop operations on up, are discovering the many benefits of leasing such as:
The convenience of a single payment. Leasing often is available to cover not only the core price of the equipment, but also labor, installation, delivery charges, and sometimes even maintenance and training costs.
No down payment required. Normally, leases can commence with only one or two advance payments.
Lower monthly payments. Lease terms can be extended as long as five years--- sometimes even longer--- which translates to low, manageable monthly payments.
Conservation of working capital. Leasing normally does not require a large outlay of cash to acquire equipment.
Preservation of lines of credit. Leasing does not usually affect bank lines of credit. Banks generally allow a company to borrow freely, even though it has leased equipment on it's books.
Elimination of equipment obsolescence. Leasing allows a company to continually upgrade existing equipment to the latest technology, thereby avoiding the trap of owning out-dated equipment.
Tax benefits. Many leases can be structured as "off-balance sheet" transactions, allowing payments to be fully tax deductible. This also simplifies bookkeeping by eliminating complicated depreciation schedules.
FAQ'S
of the Leasing Industry
How
long is the lease application process?
When the Leasing Company receives a completed online credit application,
we can render a credit decision in as little as five minutes.
Can I
select my own equipment?
Yes. You have the choice of selecting your own equipment up-front and then
applying for a lease or you can get pre-approved and then select your equipment
with confidence. Remember that the equipment chosen must be for business
purposes only.
Once I
am approved, what happens next?
Once the credit application is approved, lease documents are delivered to you
for your signature. Once we've received the signed documents and you've accepted
your equipment, we will make payment to the vendor.
How
will leasing affect my company's cash flow?
In a word, positively. That's because leasing usually offers lower monthly
payments than other financing sources. Those lower payments can help you bring
revenues and expenses into closer alignment. And because payments are fixed, you
can forecast future expenses more accurately and improve your budgeting process.
Is a
down payment required?
Leasing is generally considered 100% financing, with as little as one advance
payment required.
How are
lease payments structured?
There's considerable flexibility in payment arrangements. While most leases
provide for regular monthly payments, those payments may be made in advance, in
arrears, or at irregular intervals. Terms range from 24 to 60 months and can be
customized to suit your company's needs.
Can
lease payments be reduced?
Lower monthly or quarterly lease payments can be negotiated, usually by
extending the term of the lease. Assuming that payments are fixed, an extended
term can reduce the amount of the individual payment. It's important to
understand that while an extended term may lower the amount of the individual
payment, the aggregate amount paid over the term of the lease will be higher.
Can I
purchase the equipment I've leased?
At the end of the lease term, you have three options:
What is a
"fair market value" purchase option?
If your lease contains a "fair market value" purchase option, you can purchase
the equipment at the end of the lease for its fair market value-the price at
which the equipment you've leased would be sold by a willing seller and
purchased by a willing buyer.
What is
a "dollar-out" purchase option?
A "dollar-out" purchase option gives you the opportunity, at the end of the
lease, to purchase the equipment you've leased for $1.
What is
"Purchase Upon Termination" or "PUT"?
"Purchase Upon Termination" is a type of lease in which you purchase the
equipment for 10% of the original purchase cost at the end of the lease term.