For many companies capital equipment is a necessary cost of doing business. As the prices of tractors, forklifts, and other heavy machinery continue to skyrocket, business operators must find more cost-effective ways to stay afloat. Equipment leasing is a popular option for businesses of all sizes and types. After exploring these top 10 benefits of equipment leasing, you'll understand why.
When a company purchases equipment, it acquires an asset that it can keep, sell, or lease as it sees fit. In these cases, business operators do a ton of research before buying such expensive equipment. They know that to get their money's worth from the purchase the equipment must meet the company's requirements as closely as possible.
If you work in an industry that's constantly being disrupted by new technologies and shifting business models, this approach may not work for your business. Instead of buying expensive equipment that has a 20-year expected life, you may be better off leasing your equipment and turning it in at the end of the agreement. You can then sign a new lease and get the updated equipment that you need to remain competitive in your area of expertise.
Many people consider equipment purchases to be a plus when it comes to tax deductions. According to IRS Publication 946 Section 179, a business can write off the capital expense of equipment and lower its taxable liability by up to $1,040,000 in 2020. There are some stipulations, however. Your business must purchase less than $2,590,000 of equipment per year to take advantage of the deduction. This is a significant constraint for mid-sized and large businesses. These companies may be better served with an equipment lease agreement.
Under the IRS rules, equipment lease payments are 100% tax deductible. There is no limit on the amount of equipment that you can lease or on the amount that you can deduct. According to industry experts, the tax savings for the business can be more than the total equipment lease payments in some cases.
Some market changes are cyclical and not brought about by unexpected disruptions. When you can predict a future need, you can better prepare for it with the right equipment lease. Most equipment lease agreements give you the option to buy the equipment at the end of the agreement.
You know that a new model of your equipment will be coming out in seven years. That piece of equipment will make the current model obsolete. In such cases, you may decide to purchase the leased equipment at the end of the agreement. The amount that you will pay will be discounted to reflect fair market value. If timed just right, the leasing company will have done the major repairs and maintenance services on the equipment during and in between lease agreements.
Paying for the equipment will likely cost you less in the long term than paying monthly payments on another set of leased equipment. When the new equipment emerges from production in seven years, you can sign another lease agreement for that upgraded equipment.
Purchasing equipment adds assets to your balance sheet, but more often than not it also increases your company's debt load. Very few companies are able or willing to use large amounts of their own cash reserves to buy capital equipment. Instead, they turn to lenders to finance those expensive assets. Those large bank loans are reported to credit agencies, and they often result in lower credit scores.
When you lease equipment, your leasing agent runs an initial credit check that only minimally impacts your credit score. Credit agencies don't view lease payments in the same way that they do loan debts. Leasing agreements have only a minimal impact on credit scores.
Every business wants to increase its standing in the marketplace with a great credit score. A solid credit score indicates that your company is reliable and financially responsible. When you pay your lease payments on time, it gets reported to the credit agencies, and your credit score can increase as a result.
Most equipment purchases represent a huge financial outlay, and banks and other lending institutions nearly always require a down payment to reduce their risks of loaning you money. The down payment amount will vary based on the amount of the loan, your creditworthiness, your outstanding debts, and other loan terms. It's not uncommon for companies to pay down payments of up to 25% of the loan amount.
Equipment leases are usually approved without the need for hefty down payments or collateral. Equipment leasing agencies usually require that you get insurance coverage for the equipment, and then you're good to go.
One of the biggest attractions of equipment leasing are the affordable monthly rates. When you purchase equipment with cash reserves, you can spend a small fortune just to get the minimal amount of equipment that you need to operate. If you get a bank loan, you pay the full price of the equipment, and your monthly payments reflect this.
When leasing equipment, you only pay a portion of the equipment's cost. This equates to lower monthly payments for the duration of your lease agreement since bank loan monthly payments are paid on the total cost of the equipment.
Nothing messes up a budget quite like uncertainty, and that's what you'll find when you opt for a bank loan to make equipment purchases. Banks want to help your company to thrive, but they're really in the business of loaning money for profit. Profit comes when they collect interest on the money that they lend to you. The interest rates that they charge are usually tied to an ever-changing market, and the amount of interest that you pay this month may not be the same amount that you will pay next month. With a lease agreement, you pay fixed monthly fees that make it easier to stay on track financially.
When you purchase equipment with your own funds or through bank loan financing, you're responsible for insuring the equipment. Legal liabilities for the equipment fall squarely on your shoulders. This isn't the case when leasing equipment through agencies. While the leasing agency usually requires that lessees get liability coverage as part of the agreement, making sure that the equipment is adequately covered is actually the leasing company's responsibility. It holds the title and is legally liable for the equipment as the equipment owner. That's why many leasing agencies simply make their liability coverage available to lessees. The lessee pays a portion of the cost of coverage as a part of its monthly payments. The leasing company's insurance policy generally offers wider coverage and no deductibles.
Emergencies inevitably crop up no matter how much you plan, and lines of credit are part of many business operators' risk management tools. Leasing equipment allows you to keep those lines of credit open for emergencies instead of using them to purchase new or replacement pieces of equipment.
When it comes to acquiring heavy equipment, business operators have a number of options available to them. However, traditional bank loan financing is increasingly being sidelined in favor of equipment leasing. In addition to the above-mentioned benefits, you'll find that the process of leasing equipment is more streamlined than bank equipment loan processing. You can get your lease application approved within a day versus weeks. This is just what agile companies need to quickly scale up their operations to capture new opportunities