Leasing equipment helps you acquire the latest equipment that otherwise would be unaffordable if purchased. Banks and finance companies may lend you money to lease equipment, or the equipment manufacturer may facilitate the financing directly. The loan term is usually tied to the term of the lease.
Leasing equipment is convenient for companies:
- Looking for flexibility to manage their tax liabilities. Leased equipment is treated as an expense on your company’s taxes.
- Wishing to keep equipment up to date. You do not have to buy new equipment once it becomes obsolete; just replace it when the lease ends.
- That want to preserve operating capital. Your cash is not tied up in buying the equipment outright.
- That do not wish to make a down payment. This helps you keep a healthy business cash flow.
Equipment leasing has some problems:
- You cannot cancel the terms; most likely, you will be required to make all the payments, even if you stopped using the equipment.
- Due to interest rates, you will pay more money over the life of the lease than purchasing the equipment outright.
- You will pay insurance on the equipment.
- Leasing is harder than financing the equipment. There is more paperwork required, such as detailed and updated financial information, how the equipment is going to be used, and complicated lease terms to negotiate.
- Equipment leasing contracts require you to maintain the equipment according to the leasing company’s specifications. When owning the equipment, you set up your own maintenance schedule.
- By leasing equipment, you cannot deduct the full cost of purchase of the equipment in the first year, under section 179 of the IRS code. You can, however, deduct the monthly expense.
- There are many transaction fees, such as UCC-1 Fees (a one-time fee) and document fees.
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