Every business has a different mission, vision, and strategic end goal. That's why there are so many financing options when it comes to acquiring equipment. Equipment leasing is a popular one. Is it the best option for your business? Take a look at these examples of when equipment leasing works and doesn't work for businesses that operate in these specific industries and sectors.
Farming is one of society's most beneficial industries. It's responsible for producing food, clothing, and building materials. The U.S. government considers agriculture to be so important that it grants deep tax incentives for farming equipment purchases. Leasing companies buy the equipment and lease the items to farms at discounted rates. This is just one example of how leasing agricultural equipment is a win for farms.
Heavy equipment tends to come with a hefty price tag. Leasing equipment such as tractors and irrigation systems can help farmers to better manage their cash reserves. Besides coming with low, fixed monthly payments, leases are known for their flexible terms. Farmers can get a short-term lease for heavy equipment that's only needed seasonally. When the season ends, they simply return the equipment.
Technology has disrupted every industry, and agriculture is no exception. However, there's still room to grow when it comes to applying technology to farming operations. State governments have given out research grants to farms that use technology in farming production. Leasing helps to ensure that you have equipment that incorporates the latest technology if you have one of those grants.
There are instances when agricultural equipment leasing doesn't make sense. If you operate a farm that only uses small pieces of equipment that are relatively inexpensive to replace, then it makes more sense to buy those items. Some examples of farms that don't require a lot of heavy equipment include apiaries, fruit orchards, and flower farms.
Many farmers are masters at self-sufficient living and have well-honed mechanical repair skills. When another farm goes out of business, they are ready to snap up good deals on older pieces of heavy equipment that less-skilled farmers pass up. If you have the time and skills to repair tractors and other farm equipment, it'll be more cost-effective for you to purchase and not lease equipment when bargains become available.
U.S. manufacturing has taken a hit in the last two decades with many factories shutting down and moving operations overseas. However, certain industry experts believe that there will be a time when making goods overseas and importing them via expensive cargo freight to the United States will no longer make good financial sense. When that time comes, manufacturing companies may need to quickly spin up factories in the United States that meet the national standards and regulatory constraints. One of the most cost-efficient ways to do this is to lease equipment and heavy machinery.
Besides having an initial large financial outlay, manufacturing companies that purchase equipment must consider the cost of equipment repairs. Unlike pieces of farming equipment that get a break during the off-season, pieces of manufacturing equipment tend to get used on a continuous basis. Heavy usage almost always equates to more repairs. With an equipment lease, a manufacturing company can return the equipment before major repairs are needed.
There's an element of risk in every business, and having an exit strategy is a smart idea. A manufacturing company that has purchased equipment and holds the title free and clear has equity. It can use the equipment to borrow money to stay afloat, or it can use the equipment to attract a buyer if it decides to call it quits.
While there's been a decided slump in manufacturing, business is booming in its sister sector of logistics. Amazon has paved the way for nearly anyone to become a successful e-commerce seller. Entrepreneurs and established businesses alike are picking up discounted goods, adding valuable modifications, and reselling them to the public online. To get these goods to customers in different geographic locations, Amazon has a network of warehouses that sorts and ships orders. The company has strict guidelines about how goods need to be packaged for shipping, and this has given birth to preparation centers that pack a variety of goods and ship them to Amazon fulfillment center warehouses. These facilities require forklifts to move large volumes of goods.
The size of forklift that a warehouse needs varies based on its mission and volume of customers. According to Manufacturing.net, a standard forklift can cost up to $25,000. An upgraded one can cost between $50,000 and $100,000. If your warehouse processes a lot of orders, it's not uncommon that it would need a fleet of forklifts. This can get expensive, which is why nearly every warehouse leases forklifts. Warehouses pay about $650 per month to lease standard forklifts. This flat fee includes the cost of the forklift and its battery and charger. When structured properly, a forklift lease agreement can include maintenance services as well.
Trucking companies and independent truck drivers move goods all over the country, and there's rarely a time when there's not a shortage of them. This is why many people switch careers and earn their commercial driver's licenses to drive trucks. After getting a taste of the open road, many drivers seek to be their own boss and not drive for companies anymore. However, they need a truck, and few have the money or the credit to finance a semi-trailer truck, insure it, and maintain it. Instead, they turn to leasing agents.
Leasing a truck allows drivers to get into a well-maintained semi with no down payment and an uncomplicated application process. Financing companies know the industry, and they don't penalize drivers for high mileage or general wear and tear.
While leasing trucks can be a good option for many new operators or established trucking companies, there can also be hidden pitfalls with truck leasing. Leasing a vehicle will almost inevitably cost more in the long term than purchasing one outright. It's the low monthly payments that make the deal attractive. However, some lease agreements attach extra fees for maintenance service packages that you may or may not need. The monthly payment is no longer low and no longer attractive.
Leasing computers, servers, and other network equipment allows you to get a lot of equipment for a fixed, affordable monthly fee. This means leaving cash reserves and credit lines for other expenses.
Leasing also means that the finance company retains ownership of the equipment, and you simply return the equipment at the end of the leasing period. Instead of getting stuck with outdated computers, you can sign another lease agreement and get the latest technology.
One drawback of acquiring leased IT equipment is inflexibility. Some IT companies come up with creative solutions to adapt to changing requirements. If these solutions involve modifying equipment in any way, you'll need to think of another workaround if you have leased equipment.
The type of business that you operate is only one factor in determining whether or not equipment leasing is a good option for you. You'll also want to consider the current life cycle phase of your business. A brand-new startup often has different equipment financing needs than an established company.
Also, your CPA has more detailed information about the benefits and disadvantages of equipment leasing from a tax perspective. For best results, choose one that has deep knowledge of your industry.