New equipment leasing describes the option to pay a set monthly cost for the right to use equipment as your own, without some of the benefits and disadvantages of full ownership. In many instances, leased equipment is insured up to a point, and repairs and maintenance are paid for. However, you may lack the right to modify the leased equipment unless agreed upon otherwise and may need to return it in a particular condition by the lease’s end.
But the main advantage of an equipment lease is that it is often more cost-effective and serves as a better investment for your business than an outright purchase of new or second-hand equipment or an equipment loan – especially when the equipment in question is something that requires frequent upgrading, like an animator’s computer workstation, or is only needed on a seasonal or job-to-job basis, like a harvester or a crane.
Equipment leases are different from other forms of financing in that they come with built-in collateral. Rather than take out a cash loan to reinvest in your business with a harsh interest rate, equipment leases allow you to utilize the equipment being leased as security. Leases also importantly allow you to use equipment that you would not otherwise be able to afford, meaning your business can tap into the production value and logistical benefits of a more efficient and newer type of equipment and potentially make a much greater profit than through defective equipment.
How Do Equipment Leases Work?
Equipment leases work like any other type of lease. The lease terms are clarified through the lease document, including the rate and value of each monthly payment, as well as add-on agreements such as maintenance. Except for short-term leases or equipment rental leases, most leasing contracts for new equipment run anywhere from upwards of a year to ten years. It depends on the kind of equipment being leased and the agreement between the lessee business and the lessor owning the equipment.
Once the agreement is officiated by being signed, witnessed, and notarized, the equipment may be used as long as the terms of the agreement are honored, including the monthly payment. Once the deal expires or the lease is up, you may negotiate a new lease for a different piece of equipment, buy the equipment that’s been leased, or terminate the relationship.
Equipment Lease vs. Equipment Loan
There are several differences between an equipment lease and an equipment loan. First and foremost, an equipment loan usually involves borrowing money to buy equipment, with the equipment serving as collateral. With an equipment loan, your business owns the equipment outright from its purchase. However, it may lose the equipment if it forfeits on loan.
Why Consider New Equipment Leasing?
Unlike a lease, an equipment loan affects your credit score, for better or worse. Loans can be more or less costly than leases monthly, depending on how the loan is structured. A distinct disadvantage of opting for an equipment loan over an equipment lease is that it can become more complicated to upgrade your equipment, as you must first find a buyer for the old equipment before taking out a new loan. In contrast, most equipment leases can be used to upgrade to new equipment over the years periodically.
Maintaining Cash Flow
Equipment leases allow you to maintain a strong cash flow for your business over opting for outright purchase or an equipment financing plan with a hefty deposit. You get to keep most of your current cash capital while reaping the full benefits of brand new equipment for your business.
No Down Payment
This is an optional benefit. Some leases become more flexible or favorable if you opt to pay a deposit. If your credit isn’t good enough or your revenue isn’t up to snuff, an upfront deposit may allow you to enter into a lease agreement you wouldn’t have been able to enter otherwise. But under most circumstances, one of the benefits of a lease over other types of financing for new equipment is that you continue to pay the same amount each month, month to month until the lease stops being renewed.
Tax Benefits of New Equipment Leasing
Buying new equipment allows you to write off the equipment’s gradual depreciation as a minor tax break. But when you lease equipment, you don’t own it. Can you still write off its depreciating value? No. However, you can use every single lease payment as a deductible expense. In addition to this tax break, businesses may take advantage of IRS Section 179 to further deduct their new equipment’s value from their taxes in the year of the equipment’s acquisition.
Section 179 allows taxpaying businesses to deduct up to $1,050,000 in 2021 of an equipment’s value within the year it was put to use, rather than spread out across multiple years of ownership, which may apply to your equipment. There may be other critical financial benefits to leasing new equipment rather than buying it outright. Consult your accountant for more detailed information.
At the end of the day, if you want to own the equipment you’ve leased, you probably can. Many leases are written with a lease option that allows the lessee to purchase the equipment for the remainder of its value after the lease terms are over or for a nominal value (such as $1) if the equipment has been more than paid for throughout the lease. This gives lessees the flexibility to opt for an upgrade and a continuation of the lease or to cut their costs and keep the equipment they’ve been using thus far, making ownership official with little to no hassle or additional paperwork — a win-win for both sides, the lessor, and the lessee.
Equipment loans and leases are an essential part of any business’ debt strategy. All companies must leverage credit efficiently and intelligently to continue growing and maintaining a technical cutting edge while preserving capital and the option of a cash loan for different investments or a rainy day. Want to learn more about what a new equipment lease might cost you? Give us a call, and let us discuss your options together.