Top 4 factors to know about equipment leasing
Equipment leasing can be suitable for those who own a small business but cannot afford to buy all the new equipment and/or technology for their business. Leasing allows you to make smaller monthly payments, which could be spread over a multiple-year period. There are several aspects that need to be considered in equipment leasing to avoid financial roadblocks in the business. The following article answers queries about the types of equipment leasing, its benefits, and more.
What is the difference between an equipment loan and equipment leasing?
- Equipment loan– Buying an equipment and financing it with a loan lets you loan the equipment. This allows the buyer to spread out the price of the purchase over several years, thereby paying back the principal plus interest amount over the loan term. Most people compare equipment loan with finance agreement, which operates like a capital lease.
- Equipment leasing– Leasing is in complete contrast with an equipment loan. Equipment leasing only allows the user to rent the equipment; you don’t own the equipment when you lease it unlike buying it on loan. However, there are types of equipment leases that allow you to buy the equipment at the end of the leasing period. One of the major differences between leasing the equipment and buying it on loan is, you don’t save on the interest if you pay off the lease early. This is because you have only agreed to pay monthly payments and not the principal and interest.
What are the different types of equipment leasing?
Equipment leasing is categorized based on the terms and conditions mentioned in the agreement. Following are the different types of equipment leasing available today:
- Operating lease– Renting an equipment for a short-term requires an operating lease. It could also be the right option if you are planning to replace the equipment at the end of the financial term.
- Capital lease– Capital lease is chosen when a business requires to lease large equipment, allowing you to earn its benefits like claiming its depreciation.
- $1 buyout lease– It is a type of capital lease which requires monthly payments to use and access the payments. The user has an option to buy the equipment for $1 at the end of the lease.
- 10% option lease– Similar to $1 buyout lease, 10% option lease gives you an option to buy the equipment at 10% cost at the end of the agreement. For instance, if you have bought a $20,000 equipment on lease, you can buy it at the end of the agreement for $2000.
What are the benefits of equipment leasing?
Here are some advantages of equipment leasing:
- Flexible financing terms– There is no down payment in equipment leasing, this preserves lessee’s borrowing capacity and capital. Moreover, you can choose to exclude equipment leasing from your balance sheet and show it as an operating expense and not a liability.
- Tax benefits– Although you can choose to exclude the equipment leasing from the balance sheet, it can have its own set of tax benefits, allowing you to have a better cash-flow in the business.
- Maintenance– According to the usual terms of the agreement of equipment leasing, the lessor (the person putting the equipment on rent) is responsible for the maintenance associated with the leased equipment.
- Speed– Leases are preferable if you are in a need to secure an equipment quickly. You can acquire equipment on lease for your business more easily than a loan.
- Cancellation options– In case if the equipment proves inadequate for your business’s needs, you can cancel the lease in the middle of the agreement term.
What is a Terminal Rental Adjustment Clause (TRAC) lease?
- A Terminal Rental Adjustment Clause (TRAC) lease works on both the capital as well as operational leasing. It is used only for the acquisition of vehicles like trucks and semi-trucks.
- TRAC lease has a lot of flexibility as it offers room to negotiate the purchase price of the agreement based on what the vehicle will be worth at the end of the financing term
- Small business owners use TRAC lease to rent commercial vehicles. It helps in lowering the monthly payments as it requires a large amount of the purchase price to be paid at the end of the term.