Equipment Leasing

Another way to keep equipment costs down is to lease instead ofbuy. These days, just about anything can be leased–from computersand heavy machinery to complete offices. The kind of businessyou’re in and the type of equipment you’re considering are majorfactors in determining whether to lease or buy. If you’re juststarting out and only need one computer, for instance, it probablymakes more sense to buy. On the other hand, if you’re opening anoffice that will have several employees and require a dozencomputers, you may want to look into leasing.

According to the Equipment Leasing Association of America,approximately 80 percent of U.S. companies lease some or all oftheir equipment, and there are some thousands of equipment-leasingfirms nationwide catering to that demand.

Leasing advantages include: making lower monthly payments thanyou’d have with a loan, getting a fixed financing rate instead of afloating rate, benefiting from tax advantages, conserving workingcapital and avoiding cash-devouring down payments, and gainingimmediate access to the most up-to-date business tools. Theequipment also shows up on your income statement as a lease expenserather than a purchase. If you purchase it, your balance sheetbecomes less liquid.

Leasing also has its downside, however: You may pay a higherprice over the long term. Another drawback is that leasing commitsyou to retaining a piece of equipment for a certain time period,which can be problematic if your business is in flux.

Every lease decision is unique, so it’s important to study thelease agreement carefully. Compare the costs of leasing to thecurrent interest rate, examining the terms to see if they’refavorable. What is the lease costing you? What are your savings?Compare those numbers to the cost of purchasing the same piece ofequipment, and you’ll quickly see which is the more profitableroute.

Because they tend to have little or no credit history, startupsoften find it difficult or even impossible to lease equipment.However, some companies will consider your personal rather thanbusiness credit history during the approval process.

If you decide to lease, make sure you get a closed-end leasewithout a balloon payment at the end. With a closed-end lease,nothing is owed when the lease period ends. When the lease periodterminates, you just turn the equipment in and walk away. With anopen-end lease, it’s not that simple. If you turn in the equipmentat the end of the lease and it’s worth less than the valueestablished in the contract, you’re responsible for paying thedifference. If you do consider an open-end lease, make sure you’renot open to additional charges such as wear and tear.

Finally, balloon payments require you to make small monthlypayments with a large payment (the balloon) at the end. While thisallows you to conserve your cash flow as you’re making thosemonthly payments, the bad news is, the final balloon payment may bemore than the equipment is worth.

There are many different avenues through which you can secure anequipment lease:

• Banks and bank-affiliated firms that will finance anequipment lease may be difficult to locate, but once found, banksmay offer some distinct advantages, including lower costs andbetter customer service. Find out whether the bank will keep andservice the lease transaction after it’s set up.
• Equipment dealers and distributors can help you arrangefinancing using an independent leasing company.
• Independent leasing companies can vary in size andscope, offering many financing options.
• Captive leasing companies are subsidiaries of equipmentmanufacturers or other firms.
• Broker/packagers represent a small percentage of theleasing market. Much like mortgage or real estate brokers, thesepeople charge a fee to act as an intermediary between lessors andlessees.

For more information on leasing, contact either the Equipment LeasingAssociation or the Business Technology Association. The LeasingSourcebook, published by Bibliotechnology Systems and PublishingCo., is a directory of companies that lease equipment. You can alsocheck your local Yellow Pages for leasing companies.