What is an Equipment Lease Contract?
An equipment lease contract is a contractual agreement where the lessor, who is the owner of the equipment, enables the lessee to use the equipment for a specific period in exchange for periodic payments. The equipment you can lease may be machine tools, computer hardware, or any other equipment. When the lessor and lessee agree to the lease, the lessee receives the right to operate the equipment and, in return, makes regular payments throughout the lease period. The lessor holds ownership of the equipment and has the right to cancel the equipment lease contract if the lessee contravenes the terms of the agreement or engages in a prohibited activity utilizing the equipment.
Equipment leasing is an attractive alternative for these purchases because it helps you relieve your resources’ pressure, including a considerable, one-time cost. Nevertheless, service equipment leasing isn’t for everybody, so you must comprehend its advantages and disadvantages.
In the post, we’ll explain the advantages and disadvantages of equipment leasing so you can make the best decision for service.
Advantages and Disadvantages of Equipment Leasing?
Advantages of Equipment Leasing
1. Less In Advance Cost for Equipment Purchases
Among the most appealing advantages of equipment, leasing is that the lease allows you to expand your purchase expense. With a lease, instead of purchasing your equipment and owning it, you make regular monthly payments to the business leasing you the equipment.
The total expense will usually be less than what you would have paid to own the equipment. Plus, you make the lease payments incrementally, usually monthly.
2. Easy to Update to Better Models
It’s far easier to upgrade to much better designs when you lease equipment, mainly if you know how you structure your lease. For example, let’s say you need a particular kind of equipment. However, you anticipate a better design in 2 years. By signing a leasing agreement for a two-year term, you can quickly sell your old model and upgrade to the new one at the end of your lease.
With an equipment lease, you don’t have to stress about selling it because you don’t own the old design.
3. Greater Flexibility than Other Choices
Equipment leases are handy when you wish to purchase a tool that you’re not 100 percent sure you’ll need long-term. After all, you can’t predict the future; however, sometimes you require things now that might not work later on.
With conventional equipment financing or acquiring the equipment outright, you run the risk of getting stuck with equipment that you may only require short-term. An equipment lease gives you flexibility. If the equipment becomes unnecessary for your company, you can eliminate it whenever the lease ends.
Disadvantages of Equipment Leasing
1. You Do not Own the Equipment
Owning equipment includes specific advantages such as tax savings. Nevertheless, if you lease equipment, you might not get those advantages. Also, when you lease equipment instead of own it, the value of that possession is not on your books.
Naturally, this can be an advantage; however, it might likewise frighten other loan providers or possible investors since they see your lease as a liability.
2. You’re Paying interest
While leasing equipment isn’t like an equipment loan, you’ll likely still have to pay interest. The typical interest rates for equipment leases vary, but generally, you’re going to pay around a 5 percent APR.
Obviously, suppose you buy the equipment outright. In that case, you can avoid paying interest, but you’ll face a future interruption to your cash flow. In that case, it could be less costly to pay the interest. That all depends on your business’s current financial situation.
3. Hard for New Businesses to get approved
If you own a brand-new organization– less than two years old– you may face some trouble obtaining this type of lease. Often, this holds true even if you have strong credit and otherwise excellent performance history. If you are a brand-new entrepreneur and require an equipment lease, you might need to pay more in advance or provide other concessions to the lessor to get the deal done.