Leasing 101: Understanding the Basics of Equipment Leasing by: John Elliott of Jocova Financial
Equipment leasing is a popular option for many businesses who are looking to acquire equipment. The purpose of this article is to briefly discuss some of the general aspects of an equipment lease with respect to businesses who may be considering utilizing it as a tool. Topics explored include: what an equipment lease is, how it works, the parties involved, what equipment can be leased, and why a business would consider equipment lease financing.
What is an Equipment Lease?
Equipment Leasing is a financial product that allows businesses to acquire equipment on a fixed payment plan versus paying the full equipment cost upfront.
An example of this is within the auto industry. When a customer is interested in purchasing a car, rarely do they pay the full purchase price up front. Instead, customers will use a finance option which allows them to pay off the car on a monthly basis. This is similar to equipment leasing, but instead of cars, equipment leasing deals with assets such as tractors, construction equipment, trailers, landscape equipment, office equipment, manufacturing equipment, and more …
More formally, a lease is a usage agreement (rental) between an equipment owner known as the lessor (Funder) and the user of that equipment, known as the lessee (business entity). The lessee pays a periodic fee or rental payment, usually monthly, to the lessor for the use of the equipment. At the end of the agreed upon term, the lessee is responsible for executing a purchase option to gain title and ownership of that equipment.
Typical purchase options range from $1.00 to $750.00 OR are based off of a percentage of the original equipment cost which is typically between 5% and 25%. The standard purchase options in small ticket leasing are $10.00 for a standard capital lease and 10% for a stretch lease.
Furthermore, leases generally take the form of written contracts that range from 24 to 72 months and have specific terms & conditions laid out which detail the obligations and duties of the lessee. Some of the terms & conditions of note include the repayment term, responsibilities & restrictions, insurance requirements, buy-out & early purchase option and, any additional fees & charges that may be applicable.
Pro Tip: Always be sure to read and understand your equipment lease contract in full and understand your obligations. Not all equipment lease contracts are created equal. Understand specifically how your lease will terminate and what your responsibilities are in terms of notifying the lessor.
Who Are the Parties Involved?
It is important to understand that the equipment leasing industry is made up of two major parties: i) Funders; who work directly with customers and, ii) Brokerage Firms; who syndicate transactions through various lenders depending on the customers’ credit profile.
Both Funders and Brokerage Firms have particular advantages over one another. To illustrate this, a Funder may be able to offer terms that are more competitive than if a Brokerage were to syndicate the same transaction through that Funder. However, a Brokerage could obtain better terms through a different lending channel which has a greater appetite for that particular transaction profile.
Funders only have one source for their money to lend, themselves. This means that they only have one credit box which governs their credit criteria and so, places restrictions and limitations on customers they can approve. A Brokerage has the ability to syndicate transactions to lenders who have an appetite for “that” particular credit profile to get the transaction approved.
Although both the Funder and Brokerage can be more competitive than the other in different capacities, 9 times out of 10, the terms and rates will be relatively aligned based on current market offerings. This allows the 7 out of 10 businesses that utilize equipment leasing as part of their strategic planning, to place more emphasis on the actual equipment they are considering and less on the leasing company they use.
What Kind of Equipment can be Leased?
Typically, businesses are leasing equipment in order to expand, replace aging equipment and/or meet the demands of new customers and contracts as well as maintain their competitiveness and efficiency.
Here is a general list of the most commonly equipment leased:
- Agricultural Equipment
- Automotive Equipment
- Communication & Telephone Equipment
- Computer & Technology Equipment
- Fixtures & Racking
- Forestry & Logging
- Industrial & Manufacturing Equipment
- Landscape Equipment
- Machine Tools
- Material Handling Equipment
- Medical & Health Care Equipment
- Office Furniture & Equipment
- Printing Equipment
- Restaurant & Hospitality Equipment
Equipment leasing is typically offered by most equipment dealers and marketed to their commercial customers. Alternatively, you can easily find many reputable leasing companies on your own to work with by seeking out referrals and conducting research online.
Pro Tip: If you are considering leasing of a specialized asset (not on the list above), ask the supplier what kind of leasing programs they have available. Many suppliers don’t market their leasing options well, but that doesn’t mean they don’t have the option available.
Why Would a Business Consider Equipment Leasing?
Many businesses look to equipment leasing as a viable means to acquiring the equipment they need to operate because of the many benefits associated with the product.
Here are some of the main reasons why a business would consider lease financing:
- Easy and Quick Approval Process
- Low Monthly Payment Options
- Improves a Companies Cash Flow Position
- Pay for the Equipment as you Profit from its Use
- Preserves Capital
- Maintains a Companies Borrowing Power
- Overcomes Budgetary Limitations
- Limited Security & Disclosure
- Possible Tax Benefits
- Avoids Obsolesce of Equipment
- Simple Documentation Process
Equipment Leasing is a great tool for small and large businesses alike to easily gain access to equipment with little effort and many benefits.
With anything in business, remember to do your due diligence. Ensure you understand the process, terms & conditions of any lease contract you enter. Most importantly, be sure to align your business with a leasing company you can grow with and who understands your business. It should be a relationship with your leasing company, not a one-off transaction.
Here is a decent video that provides an overview of equipment leasing. Note that this video is American based but the concepts play true for Canadian Businesses as well. Source