When you lease equipment, a manufacturer, dealer, or lender either buys or already owns the equipment you want. In exchange, you make monthly payments to the owner (lessor). The monthly payment structure allows you to treat the payments as tax-deductible business expenses.
Leasing also makes it easier to keep pace with technology. This is especially important if your business relies upon cutting-edge technology such as the latest computers, communication devices, or other equipment. A series of short-term leases will cost you less than buying new equipment every year or two. Some leases even have yearly computer upgrades built into them -- eliminating the difficult decision of whether you can afford to upgrade.
If you need equipment right away, leases are approved much more quickly than loans, and involve less paperwork and more relaxed credit requirements. Many equipment vendors provide lease financing, as do a number of banks. For early-stage businesses, equipment lease financing is more easily obtained from a vendor than from a bank.
Ultimately, leasing equipment will likely prove more costly than buying, but if cash flow is an important issue, then leasing is an attractive alternative.
When leasing, be sure to consider the following points:
- Lease term. What is the lease term? The length of the lease will affect the amount of your monthly payment, with a longer lease term meaning a lower monthly rent.
- Up-front payment. What is the size of any up-front payment? Can you reduce the up-front payment and amortize it over the life of the lease?
- Monthly payments. Are the monthly payments reasonable? You can analyze the amount of the payment by determining the interest factor associated with the lease.
- Return rights. For vendor-leased equipment, under what circumstances can you return the equipment if there are problems?
- Early termination. Do you have the right to terminate the lease early? Most lessors will be reluctant to do this, but you may be able to negotiate an early termination right in exchange for paying a fee.
- Option to purchase. Try to negotiate a right to buy the equipment. Equipment lessors will often give you this right at the end of the lease term, usually for a fixed price (e.g., 10 percent of the purchase price of the equipment) or at fair market value.
If you do decide to lease equipment, keep the term short -- two years is ideal. Try to negotiate a "modern equipment substitution clause" that lets you update or exchange your equipment, so you don't end up paying for obsolete technology. And insist on a cancellation clause that lets you pay a fee to cancel the lease. Be sure to note the cost of any cancellation penalty.