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How to lease business equipment

Small businesses need business equipment, but it is not always immediately affordable. Read about the solution of leasing business equipment.

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Equipment is an integral part of running a business. Depending on the size and function of a business, some equipment can be bypassed, leased, or owned. Many small to medium-sized businesses look to lease their equipment from an outside source. This is not uncommon; it is estimated that over eighty percent of smaller businesses lease their business equipment.

Oftentimes a business may not have enough money to devote to buying equipment that would in turn improve the business or aid it in meeting the demands of the consumer. By leasing the equipment, a business will be able to function and generate money while an outside source has provided the total amount of money to purchase the equipment that is necessary.

Reasons to Lease
It is going to be more advantageous to lease business equipment as opposed to taking a loan out to buy the equipment. A bank loan would require a substantial down payment, though leasing usually involves two initial payments up front. A business will be able to keep the capital they have and use it to make other investments required to run their business.

Newer and better equipment may become available during the term of a lease. Leasing businesses would want to make sure that they will have the option to upgrade at the end of the lease. Leased equipment may qualify as a deductible purchase on taxes depending on the structure of the lease. Have a business accountant check this option out.

Available Options
A business has very little limitations as far as what business equipment is available to be leased. Smaller business equipment such as furniture and phone systems to larger entities such as machinery is offered by third parties. It is a simpler process to attain a lease for purchases exceeding $5,000. Assets such as software, warranties, service, training, installation, and shipping costs are more difficult to get a lease for because the larger purchases are easier to repossess if payments are not made on the lease. For some assets it may be a requirement to take out a small commercial loan if it is not possible to lease them.

Finance Lease
This lease option will work best if the business intends to keep the equipment when the lease is done. Payments on the equipment usually are aligned to a time frame matching the working life of the equipment.

True Lease
This type of lease does not encompass the working life of the equipment. At the end of the lease, a business will have the option to disregard the equipment or to purchase the equipment outright at market value. Payments on true leases are lower than on finance leases. The leaser does have the option to resell the equipment when the business that is leasing the equipment has ended the leasing process.

Taxes Tied in the Two Types of Leases
True leases give the business (that is leasing) the option to claim lease payments for tax purposes. A tax break will not be an option for a finance lease. Finance leases will present the ability to spread payments over a longer period of time, so a business will have to consider what options will be the most beneficial for them.

There are several payment options a business can decide upon. Monthly payments are the most prevalent, but are not mandatory. Depending on the present financial situation of a business, they may want to consider their options.

A skip lease is a payment method that would be advantageous if a business takes in more capital depending on the seasons. Payments may be bypassed without incurring a penalty under this type of method.

A step-up lease is advantageous for businesses whose capital is contingent on the acquisition of the equipment. This payment option is structured to have low payments in the beginning and eventually become larger relying on the growth of the business and its capital.

A 60 to 90 day deferred lease allows a business to skip the first two to three months of payments to build capital and then begin regular monthly payments.

Lease Termination
Usually, leases extend anywhere between 6 to 120 months, with the term depending on what the business will decide to do with the equipment upon the end of the lease. At the end of the lease, a business can:

- Return the equipment with no future obligations
- Begin another lease
- Purchase the equipment at an agreed price at the advent of the lease
- Purchase the equipment at a market value

A business needs to assess what type of equipment it is (in regards to lifespan) and how much life it will have by the end of the lease. Most likely, a business will want to have the best equipment it can afford, so purchasing the equipment may not be an attractive option. A business needs to make sure that if they think it will not be desirable to purchase the equipment eventually, that it is stipulated during the initial agreement.

Evaluating Providers
The main types of service providers for leasing business equipment are brokers, captive leasing companies, or independent leasing companies.

Brokers- A broker will take a lease request to a bank or financial service that will agree to finance the purchase
Captive leasing company- A captive leasing companys main purpose is to provide leasing to its parent company and/or dealer networks
Independent leasing company- These companies are a source for funds and give directly to a leasing business. They come in the form of banks, equipment lease specialists, and diversified financial institutions.

Much like deciding on a payment method, the situation of the business will determine what source to finance from. A financial services provider that a business is familiar with would be the first place to go. If a business knows exactly what equipment they want to buy and for what duration of time, then a captive leasing company would be a good choice. For a business that is not familiar with the process, a broker would be a good place to go so they could better explain the process and choices available.

As with any business to business transaction, you want to check references first before committing to anything. No matter what avenue a business decides to take in leasing, they will want to contact references that potential leasers provide. Think of asking these questions:

- Were you treated fairly?
- Did you get the right lease for your needs?
- Did the leaser provide help with choice and paperwork?
- Did you have trouble making payments? How did they react?
- Would you work with the leaser again?

Shop around and get several quotes before getting serious about commitment. A business to business referral service will be able to link you to several potential suitors. Equipment lease applications are treated like credit checks, so a business will not want a multitude of inquiries to show up on their credit report and possibly damage future chances of acceptance. If a business does not meet the requirements of several possible leasers, then they would most likely want to go with a commercial loan.

- Negotiate your purchasing price. There are many potential suitors out there, so try and get the best price possible.
- Lower the leasing rate. Just like the purchasing price of the equipment, the rate of the lease is negotiable as well.
- Remember that it is much more difficult to lease for software, warranties, training, installation, shipping costs, etc. It may be more beneficial for a business to take out a small loan to finance these assets as opposed to leasing for them.

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