Business leasing can be a great tool to preserve capital and ensure that you don’t end up with the headache of needing to sell equipment. What is business leasing and when should you use it? Read below to find out.
When managing a business, it is often wiser to lease property and equipment than take out a credit to purchase it, let alone buy it outright. Leasing can be a great tool to preserve capital and ensure that you don’t end up with the headache of needing to sell older equipment as a trade-in for the upgrade.
Leases are also easier to find and get approved than loans, as they carry significantly less risk for the company leasing their equipment out.
Business leases allow you to remain flexible with your funds, make use of some unique tax advantages, enjoy overall lower monthly payments compared to commercial mortgage, and best of all, you will likely enjoy the benefits and full protection of warranty and paid maintenance throughout your lease.
But to make the most of business leasing, you need to know how it works, when it is applicable, and when it should be used in favor of seeking other forms of financing or making a purchase with your working capital.
What is Business Leasing?
To keep things short, business leasing involves making monthly payments to a leasing company for a temporary right to use a property or piece of equipment for as long as the lease terms dictate. This can either be a set period in a closed-end lease or for as long as you continue to make payments in an open-end lease.
Business leasing is an option in cases where:
- You don’t need the equipment or property for longer than a few months or years.
- You need a low-cost option to preserve your capital and are considering a permanent purchase much later down the road instead, usually with a different piece of equipment.
- Your business is not in a position where it can get the credit needed to downright buy the equipment you need to start working.
Business leases are not exclusive to companies that are down on their luck or need a savings plan. Even Fortune 500 companies rely on leasing plans to grow their vehicle fleets, acquire new equipment for their production lines or offices, and generally get whatever equipment or space they need for the foreseeable future.
Leasing terms are often flexible, and some leases are even written to allow the lessee to buy the equipment or property at the end of the term for the rest of what it is worth, or a nominal fee (like $1) after enough monthly payments have been made to cover the equipment’s original value and interest.
How Does Business Leasing Work?
A business lease is drafted like any other financing agreement. The lessor is in possession of the equipment or property in question, and a deal is made with the lessee regarding the terms and conditions and monthly costs of the use of said equipment or property.
This use agreement may stipulate that the equipment must be returned in generally the same state that it was provided in, for example, or that the property can be used freely, except for turning it into farmland or turning it into a residential property. The lease agreement may also be used to set in stone any guarantees or warranties, maintenance costs, maintenance or care responsibilities, and other requirements.
Once a lease document is signed, the contract is official – it doesn’t need to be notarized, though it can be for additional security, or when the equipment or property at stake is precious, and both sides want to ensure the lease is thoroughly validated.
Types of Business Leasing
Equipment can be leased for many reasons, though usually, it’s because the procurement of the equipment is a costly prospect. For example, a business seeking commercial property might not have the capital needed to outright purchase a floor of a high rise in the business park of a metropolis. But it may be able to finance a five-year lease.
Similarly, smaller construction companies might not be able to afford an additional excavator for a major job. A lease allows them to consider the financial viability of keeping a second excavator around for a year or two in order to take on a larger client and perhaps use the resulting revenue to expand the business.
To that end, business leases can usually be split into term definitions or industry types. We touched on terms earlier when we discussed open-end and closed-end leases.
These are self-explanatory, wherein a closed-end term lease involves a specific period wherein the equipment or property is leased to the lessee before reverting to the lessor. Meanwhile, an open-end lease is more flexible yet may be harder to qualify for, especially if you do not have an existing trade relationship with the lessor.
Further distinctions can be made between industries. Looking for heavy equipment leasing – from cement mixers and bulldozers to forklifts and mining bores – is very different from looking for IT or business equipment leases. Other examples include:
Urgent care facilities and clinics that want to remain competitive and offer the best medical services available know the value of modern medical equipment – but many of the equipment needed by a modern-day clinic can be expensive. Imaging tests and other diagnostic tasks can be outsourced, but dialysis machines, ventilators, and other life-saving machinery are crucial to comprehensively serving patients.
Medical leasing companies help clinics get access to the equipment they need to continue to treat patients without costing as much in monthly fees as a loan or an outright purchase.
IT and Business Equipment Leasing
Some equipment is best bought outright – such as laptops and peripherals – but lots of IT equipment can be leased. These include office equipment, printers, workstations, computers, water coolers, office kitchen equipment, telecommunication devices, and more. Anything a business would need to supply in bulk to its workforce, especially when setting up a satellite office, may be leased.
Finding the right business lease to suit your needs is all about finding the right business leasing partner. Leasing companies specialize in pairing you with the ideal lessor for your circumstances and helping you find leases your business can qualify for.