Equipment leasing is growing in popularity in recent years, as the economy is moving forward in spurts. Leasing equipment makes it affordable to keep technology and equipment up to date.
Because most leases do not require a substantial down payment, leasing enables the business owner to hold on to his cash and invest it in other areas of the business.
Dependent on the lease, it may very well qualify as a tax credit. You may be able to deduct your payments as a business expense. Recent decrease in deduction limit from $500,000 to $25,000 in section 179 of the tax code still makes it the preferred tactics for a variety of businesses.
Questions to ask yourself
How much? – Leasing offers lower monthly payments than buying, but did you factor it in your budget and monthly cash flow?
How Long? – For a short term use, leasing is almost always the best way to go. If you intend to use the equipment for 3 years or more, you might be better off with another financial program.
How quick? – Will the equipment becomes obsolete quickly? Is that a technology that is updated frequently?
How expensive? – Equipment leases enable businesses to obtain equipment and machinery that has a high dollar value. It can range from single items like heart monitor or construction machinery to smaller items needed in bulk, like software, computers, and telephones. It’s uncommon to find a lease agreement for purchases under $3,000, and many large lenders have a minimum purchase of $25,000 to $50,000.
Hard Asset? Is the equipment considered an asset and will be listed as personal property? In other words; it is not attached to a building. Soft assets like training programs and warranties do not qualify for lease.
Operating lease or finance lease? These are the two main types of equipment leases. Operating lease allows a company to use equipment for a specific period of time without ownership. The lease period is usually shorter than the life of the equipment, and the equipment is not listed as an asset. It is, however, qualified for tax incentives.
Finance lease, also known as capital lease, the lease get reported at an asset, increasing the company’s holdings. It also allows the company to claim both the depreciation tax credit on the equipment as well as the interest associated with the lease. The leasee may purchase the equipment at the end of the lease. Given the financial edge this provides, the APR for finance leases is higher and often double than the operating lease.
Additional Expenses? There are additional responsibilities that can result in expenses: insurance, extraneous costs such as maintenance and repair. Additional costs may include legal fees, documentation, fines, and certification expenses. Return of equipment, transportation and shipping costs, also may result in additional fees.
Are the terms flexible? – Depending on the structure of the lease, you can start with low payments that get increased with time, defer payments, add equipment onto the existing lease, and more. Check with the individual lender.