Need something but don't have the money? You could rent what you need. Depending on your needs and situation, renting may be a better choice than buying.
Leasing is a common way for businesses to do things today. Recent research by the U.S. Small Business Administration shows that equipment leasing has grown by about 20% over the past two years (SBA). The Equipment Leasing Association says that 8 out of 10 businesses in the U.S. lease all or part of their equipment.
Leasing is a good choice for almost every business at any stage of growth. For new businesses that haven't made any money yet, leases of $100,000 or less may be easier to handle with the owners' personal credit, if they're willing to make the monthly payments.
Comparing Leasing to Buying When you buy a piece of equipment or a car, you usually have to pay for it in full, either with cash or by financing the rest. After you've paid for it, it's yours.
On the other hand, renting equipment is a lot like getting a loan. The lender buys the equipment and owns it, then "rents" it to a business for a set number of months at a flat monthly rate. When the lease is up, the business can do a number of things. It can buy the equipment for what it's worth on the market (or a fixed or predetermined amount), keep renting it, give it back, or rent new equipment.
When you lease, you only pay for the time you use the equipment. But when the lease is over, you might not own anything. Then why rent? The answer is simple: when you lease equipment instead of buying it, you leave money in the bank that you can use to buy other things. Since lease payments are usually smaller than regular loan payments, you don't have to pay as much each month.
But keep in mind that you can't get out of a lease like you can with a bank loan or other debt. If you need a regular loan, you can sell the equipment and use the money to pay off the loan or get a new loan. Most of the time, you have to pay off a lease in full. When you sign a lease, you have to make sure you can pay the rent.
So, what kinds of equipment should a small business lease the most? Research by the SBA shows that the most commonly leased items are office equipment, computers, and trucks and vehicles.
Pros and Cons of Leasing Leasing equipment has a lot of benefits, from keeping costs stable to getting more cash flow. But the ability to keep equipment up-to-date may be the most important benefit of leasing. Leasing lets you add equipment easily and affordably or get a whole new piece of machinery to meet your future needs. This lets you move the risk of being caught with old equipment to the company that is leasing it to you.
Here are some more good reasons to lease:
- An alternative to traditional financing: Leasing is basically an alternative to traditional financing, and it can be a great option for businesses that can't get business loans.
- "financing" 100 percent Most of the time, renting doesn't require a down payment. This lets you "finance" an entire purchase, including software, hardware, consulting, maintenance, freight, installation, and training costs.
- Comfort and ease of use - It's easy to apply for a lease, and the terms of the lease can be set up to meet your needs. Equipment leases can range from $ 2,000 to $ 2 million. For smaller amounts, you can fill out a short application and get a final decision within a few days. Often, you don't even need to show proof of income or tax returns. When a business signs a lease for more than $100,000, the leasing company usually asks for detailed financial information and does a more thorough credit check than it would for a smaller lease.
Flexibility: The length of a lease can be anywhere from 12 to 60 months, depending on the type of equipment. Most leases can be set up so that operating funds, not capital funds, are used to make payments. This can get rid of or cut down on delays in the capital budget. If money becomes available in the future, leased equipment can be bought. Also, a portion of the lease payments can be used to pay for the equipment if it is bought.
- Tax Advantages: Operating leases are usually treated as a business expense that is 100% tax-deductible and is paid for out of earnings before taxes, not out of profits after taxes.
- Saves working capital: Leasing saves your working capital because it only requires a small amount of cash up front.
- Protection from inflation: Lease payments are based on the current value of the dollar. And, unlike bank lines of credit, which have rates that change, your payments are fixed, no matter what the market does tomorrow. This makes it easier to budget, plan, and grow.
- Fixed, predictable payments: If your lease payments are fixed, you can know exactly how equipment costs will affect your cash flow.
Using the services of a leasing company When you lease equipment, remember that the company that sells the equipment just sends you straight to a leasing company with which it does business. Most of the time, the company that sells the equipment works with more than one company that leases it. So make sure to get prices from more than one leasing company. It's also a good idea to get recommendations from friends and people you do business with.
Also, make sure you know who you're doing business with. Are you talking to a broker, who just sets up deals and then gets them financed through one of the leasing companies he or she works with? Or are you working with a leasing company that is putting its own money at risk?
Brokers can be helpful because they know a lot about the leasing market and can help you find the best leasing option for your needs. But just like when you deal with any kind of salesperson, it's up to you to do your research. Do your own research to make sure you can negotiate the best lease for your business.
