Hidden Benefits of Leasing Equipment
According to the 2013 Survey of Equipment Finance Activity (SEFA) conducted by the Equipment Leasing & Financing Association, computers and transportation led the way in new business volume in 2012, accounting for more than 50% of transactions.
Many companies regularly consider leasing as an option when acquiring new light- and medium-duty vehicles but don’t always think of leasing when they need to acquire new equipment.
“Equipment leasing offers similar benefits to fleet leasing, but also benefits the typical fleet lessee may not be aware of,” says Randy Hicks, executive vice president of Nations Equipment Finance of Norwalk, Conn.
“Leasing equipment allows your company to preserve capital,” Hicks says, adding that purchasing equipment in a lump sum ties up bank credit lines that could be used to invest in other areas of the business.
A stronger balance sheet is another benefit, Hicks says. Similar to an operating lease for fleet, when companies lease their equipment, it does not appear on the assets or liabilities columns of their balance sheets. Instead, it is listed as an operating expense on their income statements.
Another issue to contend with involves the equipment’s future value and its potential technological obsolescence. Leasing allows the owner to simply return the equipment at the end of the lease term and update with newer technology.
Types of Leases
Equipment leases have three basic variables: the length of the lease (term), the payment and the buyout. Similar to fleet leases, equipment leases are a minimum of 12 months and are often written from 48 to 60 months.
There are two general types of equipment leases. The most common is an operating lease (or a true lease or tax lease). At the end of the term, the company has the option to renew the lease, return the equipment to the lessor or buy it for fair market value.
The second is a capital lease (or a finance lease) in which the equipment is amortized to a dollar buyout at the end of the term, at which time the company usually assumes the asset. The capital lease essentially acts as a lease to purchase and is used over financing because it offers 100% financing and no money down.
While the capital lease is counted on a company’s balance sheet, the operating lease is not.
How and When
Understanding how you will use the equipment will dictate the type of lease and terms.
In the world of construction and contracting, leases are often written based on the length of the job. “If you don’t think you’d need that equipment in five years, you probably want to lease because you can return it to the lessor and there’s still a portion of it that hasn’t been amortized,” Hicks says.
But if you want to keep the equipment, Hicks suggests a capital lease or straight financing to pay it off and own it.
For contracts or jobs lasting about a year, equipment rental is the better option, Hicks says.
Even though you think the situation warrants, steer clear of unusually long lease terms, which increase the chance that you’d break the lease — and breaking the lease will cost you.
While companies intend on leasing computers because of their future technical obsolescence, Hicks says that in reality, upgrading systems and moving data and software every three or four years is not an easy task. Instead of returning the computers to the lessor, companies would be smart to use a lease to write down the cost and buy them out at the end of the term. Then they can decide how long to keep the computers.