Equipment leasing is a great option for cash-strapped businesses or entrepreneurs who do not want to invest their own money or for those looking for equipment leasing with bad credit. These days, all types of equipment can be leased. It can range from complex machinery for a factory to office coffee machines. From the perspective of a lessee, there are several advantages and disadvantages to equipment leasing, which we will discuss below:
Pros of Equipment Leasing
A business can obtain the equipment it requires in one of three ways. It can pay cash for the equipment or borrow money/take out a loan from a bank to buy or lease the equipment. Equipment leasing allows a company to upgrade its equipment without incurring a large upfront cost as well as equipment loans for startups. The following are the reasons why businesses choose to lease equipment.
1. Obsolescence Danger
A business (lessee) can obtain equipment/machinery on a lease, particularly if it is regularly upgraded. This allows the lessee or even a business who’s looking for start up equipment leasing to use cutting-edge technology while also allowing for a shorter lease term. Instead of purchasing new machinery/equipment, the lessee can lease it from time to time. This way, the lessee avoids the risk of obsolescence.
2. Simple Funding Source
Because the leasing process does not give the lessee ownership, there are fewer complexities for the lessee. Leasing is a simple way to obtain medium and long-term financing, and the initial cash outlay is less than that of purchasing. This also aids in the improvement of working capital flow.
3. A Term Loan is preferable
Equipment leasing companies typically process lease contracts in less time. This time is usually shorter than the time required to process a term loan or equipment loan for startups. As a result, leasing is a better source of financing than a term loan.
4. Tax Advantages
When calculating taxable profits, the lessee’s periodic rentals are treated as revenue expenses. This benefits the lessee because it allows him to reduce his tax liabilities.
Cons of Equipment Leasing
1. There has been no change to the asset
Because the lessee is not the owner of the asset, he is not permitted to make any changes to it. When purchasing an asset, the buyer has the option to alter or modify the asset to meet his specific needs.
2. Increased Cost
The lessee pays the lessor periodic rentals, which include a margin for the lessor. It is due to the risk of the leased asset becoming obsolete. As a result, equipment financing is frequently regarded as high-cost financing.
3. Asset Use Restriction
There is a risk in an Equipment Lease Agreement that the lessor will restrict the lessee’s use of the leased asset. In such a case, the lessee may be denied full use of the equipment/assets. Such a situation may arise if the lessor’s financial position deteriorates or if the lessor’s company is liquidated.
4. Penalties
If the lessee terminates the Equipment Lease contract before the lease term expires, he is usually required to pay a fee to the lessor. The lessee suffers a disadvantage by paying the penalty.
When deciding whether to buy or lease, consider the benefit of increased cash flow against the cost of leasing built into your rental agreement. If leasing makes sense for you, this type of financing can be an excellent way to expand your business.
Is it Beneficial for Businesses to get Equipment Leasing?
While owning your equipment has many advantages, leasing can free up significant capital for small business owners. A report from the U.S. According to the 2016 Equipment Finance Market Study, 39% of businesses that purchased new equipment leased it, up from 17% in 2012. Leasing capital equipment frees up cash for growing businesses even from start up equipment leasing for other financial needs. Perhaps you want to grow but can’t afford to buy new equipment. Or your industry is rapidly changing, rendering your current equipment obsolete every few years.
