As an entrepreneur when you start out, one of the biggest problems that you encounter is getting access to enough capital for buying all the equipment and machinery that is required. Usually, personal savings are extremely limited and because of an absence of a track record, institutional finance can be remarkably difficult to obtain. In such as situation, it may be worth the while to look at leasing the equipment rather than buying them outright. Of course, the nature of the equipment, the duration you would use it for, and its cost will have a direct bearing on your decision. For example, if you work alone and require a computer it is better to buy it but if you have an office and require multiple computers for your employees, then leasing could be a viable option.
Pros and Cons of Equipment Leasing
According to a study by the Equipment Leasing and Finance Association (ELFA) leasing business equipment is a practice followed by around 80% of companies in America. Leasing is popular because it affords very good protection from obsolescence, especially when you need to buy equipment that needs to be upgraded quickly. Other advantages include lower monthly payments, no down payment, tax advantages, and fixed rate of interest. Because there is no need to make any down payment, you can plow in your cash reserves into working capital.
Leasing is not without its downside; over the long term you will end up paying a higher price so it is best for equipment that needs to be used for a short term. The other issue with leasing is that you need to retain the equipment for the period of the lease even if you do not have any use for it as terminating a lease before term can be so expensive that you might not as well bother about it. However, the emergence of online platforms like LeaseQuit that help you to find buyers of your lease has proved to be very beneficial.
Important Considerations in Putting Together a Leasing Package
The very first step lies in identifying the equipment, ascertaining its cost and figuring out the duration for which you need it. Ascertaining the period for which the equipment is required depends on a number of factors such as its capacity and rate of obsolescence. When you start out you may require smaller capacity equipment but as you scale up your operations, these machines may not be adequate and need to be replaced. Also, equipment that is technology-dependent may become obsolete very fast and may not suit the demands of your customers. Therefore, you may have to replace them to stay in the reckoning.
Examine the Lease Agreement in Detail
As far as working out the lease contract is concerned, you will need to figure out whether you will be dealing with a specialist leasing company or the lease arrangements will be organized by the equipment manufacturer or supplier. Generally, it is better to work out the leasing directly from the equipment manufacturer or their approved leasing company as you can be sure of better pricing. Certain equipment may have proprietary technology. Hence, it is wise to include training, supplies, and maintenance in the leasing agreement so that you are not left high and dry without an alternative source. Make sure that the finance company you are dealing with is stable and solvent and that you understand every clause of the lease agreement. Make sure that the equipment is insured either by you or the leasing company. Ascertain in advance the responsibility of equipment repairs and maintenance as also the end-of-lease terms and conditions that govern how you will be able to return the equipment and upgrade.