For some businesses, fundamental equipment is a major expense. Purchasing expensive equipment outright can cause cash flow issues or might not be an option at all, especially for SMEs. If this is the case, you could turn to equipment leasing which provides a more affordable and manageable way to access essential business equipment.
Businesses can utilise equipment leasing as their plans require, without bearing the challenges that come with outright purchase. In this guide, we’ll be taking a deep dive into equipment leasing, exploring the different types of equipment leasing available and comparing the pros and cons to help your business find a sensible financial solution.
Table of Contents
What is equipment leasing?
Equipment leasing is a financial arrangement where a company rents equipment from a leasing company for a specified period, typically paying monthly fees. It’s a form of Asset Finance that allows businesses to access necessary equipment without the upfront cost of purchasing.
In other words, it’s when a business rents a piece of equipment for an agreed amount of time, for an agreed monthly fee. At the end of the agreed term, the business could either give the equipment back, extend its lease, or upgrade and swap it in for something newer. This will depend on the specific type of deal that has been arranged.
What are the different equipment leasing options?
When it comes to acquiring equipment for your business, leasing offers a flexible alternative to outright purchase. There are several leasing options available, each suited to different business needs and circumstances.
Here are some of the leasing options:
Operating Lease
An operating lease involves renting equipment for a short term from a lessor. Unlike a Finance Lease, it doesn't transfer ownership at the end of the lease. It's suitable for equipment with short lifespans or rapid technological changes, offering flexibility and lower monthly payments.
Finance Lease
A finance lease, also referred to as a capital lease, is a type of Asset Finance where a leasing company grants a business operational control over an asset for a predetermined duration, with the lessee typically assuming ownership of the asset at the lease's conclusion. Throughout the lease term, both parties share a portion of the economic risks and rewards associated with the asset.
Contract Hire
Business Contract hire entails businesses renting equipment for a set period, with the lessor retaining ownership. The lessee pays fixed monthly fees for usage, often including maintenance. At the lease's end, the equipment is returned with no ownership option. This offers flexibility without ownership burdens, making it ideal for managing fleets or specialised equipment.
Hire Purchase
Business hire purchase is a type of asset finance agreement through which businesses can spread the costs of paying for an asset over an agreed period with monthly instalments. Throughout the contract, the business hires the asset rather than owning it outright. Ownership is attained only after completing all payments, typically with a small fee at the end to secure full ownership.
Buying vs leasing equipment for your business
Making decisions about acquiring equipment for your business is crucial, as it directly impacts your operational efficiency, financial health, and long-term sustainability. One of the primary considerations in this regard is whether to buy or lease the necessary equipment. Each option comes with its own set of advantages and disadvantages, and understanding these factors is essential for making informed decisions that align with your business goals.
Pros of leasing equipment:
Flexibility to upgrade equipment regularly
Businesses can stay up-to-date with the latest technology or equipment models without the financial burden of purchasing new equipment outright.
Lower upfront costs
Leasing typically requires minimal upfront costs, enabling businesses to preserve their capital for other investments or operational needs.
Tax efficiency
Allows businesses to deduct lease payments as an operating expense, providing potential tax benefits. This can help in reducing the overall tax liability, thus improving cash flow management.
Cons of leasing equipment
Total cost of financing
Over the long term, leasing equipment may result in higher total costs compared to purchasing outright due to interest and fees. Businesses should carefully evaluate the total cost of leasing versus buying to determine the most cost-effective option.
Limited ownership and control
Leasing means not owning the equipment, which may limit control over customisation, modifications, or resale options. Businesses should weigh the importance of ownership and control against the flexibility of leasing.
Risk of lease termination
Leasing agreements often contain clauses outlining conditions under which the lessor may terminate the lease prematurely. These termination clauses typically include provisions related to non-payment, breach of contract, or equipment damage.
Pros of buying equipment
Control and customisation
Owning equipment grants businesses complete control over its usage, maintenance, and customisation. This level of control allows for tailored modifications to suit specific operational needs, enhancing efficiency and productivity.
No ongoing financial commitments
Unlike leasing, buying equipment outright eliminates ongoing financial commitments associated with lease payments. Once purchased, the equipment becomes a fixed asset of the business, reducing reliance on external financing and minimising long-term financial obligations.
Risk mitigation
Ownership of equipment can act as a hedge against potential risks associated with leasing, such as lease termination, restrictions on use, or changes in leasing terms. By owning the equipment outright, you have greater flexibility in managing these risks, providing stability and security for your business operations.
Cons of buying equipment
Large upfront investment
Purchasing equipment outright requires a significant upfront investment, which can strain cash flow, especially for small or new businesses. Businesses should consider the impact of tying up capital in equipment versus using it for other growth opportunities.
Depreciation
Owned equipment may depreciate over time as technology advances, potentially reducing its resale or trade-in value. Businesses should factor in depreciation when assessing the long-term value of purchasing equipment.
Maintenance and repairs
Ownership of equipment also entails responsibility for maintenance and repairs, which can add to the total cost of ownership over its lifespan. Businesses must budget for ongoing maintenance expenses and downtime associated with equipment servicing, potentially affecting productivity and profitability.
Summary: Should you buy or lease?
To conclude, whether or not you should buy or lease a piece of equipment for a business depends on many circumstances, such as the financial status of your business, operational needs, and long-term goals.
Leasing the equipment can offer significant advantages to businesses that need frequent equipment upgrades, don’t have ready capital and want the tax advantages of owning their equipment, or have long-term but unpredictable cash flows. Buying the equipment can be a better option for businesses with predictable cash flows who want the asset in their books for fixed assets and borrowing purposes, have longer-term equipment needs, and want control over large fixed assets.
Your decision is more likely to be related to cost, flexibility and the tax treatment, all of which can be checked out with our financial experts to make sure you are choosing the option that suits your business needs best.
Equipment Leasing: FAQs
Are there tax benefits to leasing equipment?
Leasing of equipment has some tax benefits. Lease payments for most companies could be deducted as operating expenses, to reduce your taxable income. Additionally, businesses can claim VAT on rental payments thereby reducing their leasing cost. However, tax can vary based on factors like the type of lease and local tax laws.
If you’re unsure how leasing equipment could impact your taxes, please get in touch with our team to see how we can help.
How much deposit is required for equipment leasing?
The deposit required for equipment when leasing, may depend on many variables such as the type of equipment, the company’s policy on deposit and creditworthiness. This can sometimes range from no deposit at all to about 10-20% of the total cost of the machine.
It’s best that you ask the lender directly, so they will tell you what kind of deposit is needed for that particular transaction.
How long does equipment leasing take to arrange?
In most cases, commercial equipment leasing companies respond to an application within 24 hours but the overall arrangements can take several days to weeks depending on the type of leasing and the amount of capital invested.
The lease is signed after the submission of an application and credit checks. This process can be quick in some cases but for others, it may take longer because of complexity or additional documentation
What happens to the equipment at the end of the lease?
The future of the equipment can depend on the terms outlined in the agreement, which can vary based on the type of lease.
The lessee might return the equipment to conclude their leasing commitment, opt for renewal for continued use, purchase the equipment outright at a predetermined price or market value, or even upgrade the equipment.
Understanding the lease agreement is crucial for determining the next steps for the leased equipment.
How to apply for equipment leasing
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