Equipment leasing simply means obtaining the use of vehicles, machinery, and other equipment on a rental basis. This saves you from investing huge amounts of capital in purchasing the equipment. The ownership still rests in the hands of the leasing company or agent, but your business benefits from usage.
Businesses can benefit from low equipment costs through leasing. In case you are wondering which type of equipment qualifies for leasing, there are no specific categories. You can lease anything from heavy machinery to computers, to complete offices. The business you are in determines the type of equipment you should lease. However, in case you are starting out and you need a single computer or printer, it makes more sense to buy instead of leasing.
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Types of Equipment Leases
Equipment leasing can be referred to by different names, but regarding options, there are two broad categories:
Capital Lease
This lease category places upon your business all the benefits as well as the drawbacks of owning the piece of equipment. The assets and the liabilities of the equipment appear on your balance sheet, and at the end of the lease period, you have the option to purchase. The two primary examples of capital lease include 10 percent option lease and $1 buyout lease.
- $1 Buyout Lease – This type of lease is for businesses that have the intention of buying the equipment at the end, but want to spread out its cost into equal periodic payments instead of having a lump sum at the very end of the lease term.
- 10 Percent Option – If your business is not sure whether it will purchase the equipment at the end or not, this is the best lease option.
Operating Lease
With this equipment leasing option, the asset doesn’t appear anywhere on your balance sheet. The lender owns the equipment and benefits from depreciation allowances. This is a good option if the equipment has a shorter shelf life or you plan to replace it at the end of your lease.
A good example of an operating lease is the fair market value lease. The only obligation is the monthly rental payments which you can often claim for tax purposes as operating expenses.
Benefits of Equipment Leasing
There are lots of benefits to leasing equipment and below are three key ones.
Cashflow Control – You can save your working capital through equipment leasing. This means you can release it for other business expenses, planned or otherwise, and other cash commitments such as business expansions. Because of the predictability of lease payments, you can plan and budget more efficiently.
Upgrade of Outdated Equipment – Depending on the type of your business, you can exploit equipment leasing from established firms such as BSB Leasing to help you keep abreast with advances in equipment technology.
Tax Benefits – You can deduct lease payments against your assessable income because these are operating expenses. Adequate working capital is also essential because you can use it to pay up any tax obligations as they fall due to avoid penalties.
Equipment leasing, therefore, works for you if the kind of equipment you require costs a significant amount to own. Instead of tying up such a considerable amount, get equipment leasing companies to offload the burden for you.