Small Equipment Leasing is popular. Why would you and should you lease small equipment? First, Let’s define “small equipment”. Small does not mean small in size and stature, necessarily. “Small” refers to a given subject equipment’s purchase price. Let’s arbitrarily use $6,000. It could be more or less. The importance part is that “small” is a number you can feasibly see coming up with other forms of finance besides leasing. This article’s purpose is to help you clarify whether you should choose to lease or take an alternate route to acquire the small equipment you want.
For example, some office items that may fall under small equipment leasing are items such as: copiers, computers, furniture, printers, scanners, phone system, signage. Then there are Industrial items such as a used milling machine, lathe, Band Saw, forklift truck and so on. There are lots of items that may fall in the category of small equipment. Note that it doesn’t matter whether the equipment is new or used, for purpose of this writing. This article is about deciding to select leasing for equipment you could otherwise afford to buy or finance in another way.
What are some considerations against leasing otherwise affordable equipment?
- You can get your lowest cash price on the equipment without being locked into a non-cancelable contract if you don’t lease.
- You can avoid hassling with a third party finance company. That is the lessor (finance company) in most equipment leases. –
- Leasing is not a simple interest method of finance. If you pay it off early you will pay the whole stream of payment plus typical termination fees, residual value and other fees.
- Often times purchased small equipment can be depreciated quickly. Standard is 5 years for office equipment. You may be able to expense the equipment in certain circumstances. That might diminish the often touted tax benefit of leasing, which could alter your course. Ask your accountant for specifics on your individual business scenario.
- Depending on the equipment, the residual value may be so low that over the term of the lease you pay for the entire equipment. That scenario favors buying over leasing.
- Leasing has certain termination expenses at lease end. There is remarketing fees, return costs at the end of the lease.
- You will have to pay property taxes on the equipment if you lease it. The leasing company will send you a bill, so there is no escaping it.
- You will have to insure the equipment or have forced placement of a high priced policy by the lessor. Most asset based leases have this clause to require insurance.
- You will have to pay to return the equipment if you don’t exercise your purchase option. Either way, its going to cost you more money for something you’ve already shelled out for.
Small Equipment Leasing does have some advantages, so what are they?
- Its easier to get financing for a lease than a bank loan
- You can make payments rather than shell out the cash if you lease. Perhaps the biggest advantage in favor of small equipment leasing
- You can likely expense the payments as rent – only in a true lease. Beware, a $1.00 buyout lease falls under the accounting rules of an installment purchase.
- You can get more equipment value than you may be able to pay cash for. This is a big benefit for small businesses
- You can bundle the service in the lease – I don’t recommend this for most situations. This requires some care and caution. A lot of grief can arise from bundled service. Read the case study I wrote if you would like an example.
Summary: Leasing small equipment is very popular with small businesses, but its merit is dependent upon each individual situation.
A copier salesman will probably never tell you that. They just assume you will lease because its easier for the rep to sell a payment than a relatively large cash outlay. It ironic to me that some of the very reasons given “for” leasing are actually better reasons to buy, not lease. For instance, it is said by proponents (usually sales people) that one should lease assets that depreciate rapidly because its a bad idea to own them. I disagree with the statement for the following reasons; the asset being leased will have a lower residual value if it depreciates fast, compared to an asset that holds its value longer. Why? Because the lease payment will be higher and total stream of lease payments will be greater if the equipment has less (residual) value. That means the lessee is financing more, and in some cases the entire equipment value. That’s because the lessee uses up most of the value during the term of the lease, compared to a high residual value item. That is, one that depreciates in value at a slower rate. My stance is that one of the benefits of leasing is that you don’t pay the entire purchase price to use (rent) the asset. You only pay for that portion you use up. It’s as though the industry is inferring that leasing is cancelable, when it is not. In other words, if you rent equipment for a fixed term (definition of a lease), how does the asset declining in value help a lessee if the rent stays the same over the term? The answer is that it doesn’t. While there are reasons to lease, the argument for falling asset value really isn’t one of them. The real truth is that leasing small equipment does have advantages, but the argument against buying an asset whose value will rapidly decline is not one of them.
For most small businesses, the question of small equipment leasing versus buying usually comes down to the answers to these three quesionts:
1)Can I afford to buy the equipment without taking money from my business that is needed for my business growth or business operation?
2)Can I get more of what my business needs if I lease it rather than buy it?
3) Are the terms of a specific lease acceptable to me?