Running a business is one of the most difficult things in the world. People usually say that a 9 to 5 job is more difficult, but those people have never managed a balance sheet where even excessive use of toilet paper can cause you a loss in profit and a massive headache.
This is why business owners and experts have come up with techniques to invest a bare minimum amount and take the maximum benefit out of that investment. Buying equipment in a business is a far outdated phenomenon now and modern business and venture capitalists believe in renting the equipment required to run their businesses. Let us walk you through the basics of equipment financing and equipment leasing.
Definition of an Equipment Lease
A lease is a contract where one party transfers the equipment to the other party for a period of time specified. After the expiration of the time period specified, the equipment becomes the property of the lessor (the owner of the equipment).
Types of Leases
When it comes to equipment finance, there are two types of leases. The first one is the capital lease and the other is an operating lease. A capital lease has the basic characteristics of a purchase agreement. In layman terms, it is the equipment leased on 100% loan. Whereas, an operating lease has the characteristics of a rental agreement. This means that the equipment is transferred back to the lesser at the culmination of the lease agreement.
Terms of Ownership and Schedule
The lessee has the option of owning the equipment at the end of the agreement if the payments are scheduled in a specific manner. In a business equipment financing plan made by professional, you get to retain significant residual value and tax advantages. This adds up as a big advantage at the end of the lease because you have to pay below the cash requirement of a conditional sales contract.
Getting your equipment as a part of a lease agreement allows you to diminish the obsolescence risk which is then placed on the lessor. If you get professional help while drafting the contract, you can even upgrade your equipment over the period of time without any additional cost as the upgraded equipment goes back to the lessor at the end of the lease.
You can beat the impact of inflation by purchasing the equipment at the end of the lease when the payment rate is at its lowest. However, getting new equipment on equipment lease plan is always a good idea and is considered a smart business practice.
The Benefits of Equipment Financing/Leasing vs. Purchase of Equipment
- In the modern world, equipment gets outdated at a very fast pace. Leased equipment can always be exchanged for a new one without the additional cost of selling old equipment and getting a new
- The money you have to pay upfront is far less than the amount you need to pay for the new purchase of your equipment. This makes it easier to lease machines that are even out of your price range if you buy them.
- According to the 179 IRS Tax code, leasing becomes 100% tax-deductible as it can be incurred as an operational expense rather than an asset.
- You have a variety of options available to you from leasing the latest technology or leasing machines that compliment the current equipment that you own.
- The equipment leasing company is responsible for the routine maintenance and hence saves you money from that head as well.