If there is heavy usage of vehicles, machines, and equipment in your business, then you might be thinking about equipment leasing as a method to reduce expenses.
Equipment leasing and finance can be a great method to provide the workforce with what they require to get the work done. Still, it might not be suitable. Before signing a contract, it is vital to know the perks and drawbacks. Carry on with this write-up to know everything about equipment leasing and its substitutes.
About Equipment Leasing
It is a kind of financing that aids small-sized enterprise holders in leasing equipment like vehicles or heavy machines.
The lease comes with a fixed time period. You will need to return the lease, purchase it, or renew it once it is up. Equipment leasing and equipment financing are two different things.
Equipment financing entails extracting a loan to buy the machinery, using it as a surety, and repaying it after a fixed period. After the loan is paid off, you own the machinery.
On the other side, equipment leasing consists of lower monthly payments. However, it is also costlier in the future as compared to equipment financing. After the end of the term period, you need to give the equipment back, rather than having the alternative of selling or keeping it.
How does It work?
Equipment leasing is more similar to a rental contract as compared to financing or a business loan. You get into a bond with a financing agency or seller as you rent a piece of machinery. Info regarding how long you will be able to utilize the machinery and how much you will pay monthly will be outlined in the agreement.
Also, it is vital to note that the equipment lease is temporary. After the end of the term period, you will need to choose if you want to purchase the machinery, find another seller, or renew the contract.
Financing works very differently. In the case of equipment financing, you will get a machinery loan to buy equipment that you then reimburse after a while.
You are paying to possess an asset that you can utilize as surety, later on, sell, or carry on using.
Different Kinds of Equipment Leasing
There are two kinds of equipment leasing, counting operating lease and capital lease. Do ask various questions and get familiar with every option before you sign a contract.
- Operating lease
This kind of equipment lease involves renting the equipment or hardware. Under this lease, you won’t get any profits of possession during the time period of your lease. After the end of the term duration, you will have the alternative to return the machinery or purchase it at its fair market price.
- Capital lease
Capital leases are a great alternative if you plan to purchase the machinery at the termination of the lease period. Typically, paying per month is higher and more like a machinery loan.
What Are the Benefits and Drawbacks of Equipment Leasing?
· No down payment needed
Probably, you’ll not need to provide a surety or down payment to acquire an equipment lease. Moreover, there are various equipment financing schemes that do not need any down payments.
But, leasing agencies will consider other factors like the balance sheets and credit score of the applicant.
· Fixed interest rate
The rates of interest are automatically integrated into per month payments. The interest rate of the applicant is fixed, providing a clearer understanding of your impending expenditures.
· Lower per month payments
Although equipment leasing is costlier in the future, the per month payments are lower. It can be an ideal alternative for small-sized enterprises facing trouble with cash flow.
· You will have no machinery after the termination of the lease
After the termination of your lease, you will have to arrange other things if you still want to utilize the equipment. You will need to choose between purchasing the machinery, renewing the lease, or seeing other equipment renting agencies.
· It is costlier
Since per month payments on equipment lease is not very high, the overall expense always ends up being more than if you were to finance the machinery. In the end, you are investing to possess the piece of machinery.
If you want to save some dollars in the future, financing can be a better alternative.
· The machinery is not an asset you will posses
You pay to possess the machinery with equipment loans. After paying the entire loan, you have the option of selling it or exchanging it. You won’t get any of these perks while you lease.