Most business owners spend considerable time analyzing and trying to improve cash flow from day-to-day operations. One method of seeking improvement is to lease necessary equipment instead of buying it outright. This saves an initial outlay for the entire cost of the equipment and spreads the expense over some term with a built-in interest cost. Equipment leasing is a very common way many small business owners help capitalize their business and manage their cash flow.
An equipment lease is a contract between the lessee and the financing company (lessor), which may be a bank, leasing company or the equipment manufacturer. The contract commits the lessee to make monthly payments over a period of time for the use of the equipment. It may also include an option for the lessee to buy the equipment, for some stated price, at the end of the lease. The amount of the monthly lease payment is based on:
▪ The equipment’s purchase price,
▪ An interest rate built into the payments,
▪ Term of the lease,
▪ Creditworthiness of the lessee, and
▪ Estimated residual value of the equipment at the end of the lease.
There may be an initial down payment required, and during the lease period, usually the lessee is obligated to maintain and insure the equipment. At the end of the lease, depending on the terms, the lessee may buy the equipment or just let the lessor take it back. Potential benefits of leasing include:
▪ Any initial down payment will, of course, be less than the total cost of the equipment. This immediately reduces cash outflow.
▪ Lease payments can be tax-deductible business expenses. If you own the equipment outright, there would be annual depreciation expenses.
▪ The lease approval process is usually relatively quick.
▪ The amount of paperwork may be less than that required for a business loan.
▪ An option to purchase at the end of the lease gives the business the right and not the obligation to purchase. This choice can enable the business to reduce the risk of owning a piece of obsolete equipment.
In evaluating whether to buy or lease, weigh the benefit of improved current cash flow against the cost of money (the interest rate) built into the lease. If leasing makes sense for you, this method of financing can be a very good way to grow your business.
PEAC Solutions is a multi-national asset finance platform, operating in 13 countries across Europe, the United Kingdom, and the United States. We specialize in originating and servicing high-volume, small-ticket leases and loans with a variety of end users, as well as providing innovative finance solutions to equipment manufacturers, distributors, dealers, and vendors.
