Equipment Leasing

Businesses have the option of buying or leasing this equipment, and there are many determining factors that affect this decision.

Following are the two types of lease option many companies provide:

-Finance Lease
-Operating Lease

Finance Lease:

A finance lease is a full-payout, non-cancelable agreement in which the lessee is responsible for maintenance, taxes and insurance. These are most attractive in cases where the lessee wants the tax benefits of ownership or expects the equipment's residual value to be high.

These are structured as equipment financing agreements with residuals up to 10 percent. The lessee purchases the equipment upon lease termination at a pre-agreed amount. The term of it tends to be longer, nearly covering the useful life of the equipment.

Operating Lease:

An operating lease is attractive to companies that continually update or replace equipment and want to use the equipment without ownership but also want to return equipment at lease end and avoid technological obsolescence. This type usually results in the lowest payment of any financing alternatives and is a good strategy for bypassing capital budgeting constraints.

The operating lease usually qualifies for off-balance-sheet treatment and can result in improved return on investment, according to the Equipment Leasing Association. It can also result in higher reported earnings in the early years. Depending on how much capital a company has to spend and how much use the equipment gets on a daily basis, buying or leasing has certain advantages and disadvantages.

Large companies often have more capital to invest in buying large pieces of equipment, but if employees use the equipment quite often, it can decrease the life of the equipment. Smaller or new businesses may not have upfront capital to purchase equipment that costs quite a bit of money, even though they may use it less.

When companies decide to lease equipment, they must decide between the finance lease and the operating lease. The type a business selects should match their equipment needs, goals and cash- flow requirements. For example, some lessees need one piece of equipment that requires a single contract. Other companies may need to continually acquire equipment and want to use a master lease that allows them to obtain many items within a single lease to avoid executing a new contract with each piece of equipment.

There are three ways to finance equipment:

-A lessee can select and order the equipment and seek financing through a lessor. For example, a business can go to a local office equipment company to obtain equipment and then it through one of the office's financing alternatives (usually a separate leasing company).
-A lessee can obtain the equipment directly through a lessor. Often in this situation the lessor is the office equipment company.
-A lessee can select the equipment by working with a vendor or manufacturer that offers leasing through its own subsidiary.

As local businesses try to compete and grow, many are looking for proven ways to address their equipment financing challenges. For them, an operating lease may be the answer.

Leasing continues to be the most widely used method of asset-based financing in the United States, and was estimated to be a $208 billion industry in 2006. Local office equipment companies agree and say the majority of their business equipment goes out through operating leases. Plus, technology has been changing very quickly. Leasing allows companies to get into different equipment and trade up rather than ending up with a used machine that they eventually hope to sell. It's a no-worry type of situation, and the business gets an updated piece of equipment.

Following are the two general questions to any customer:

-Do you want to have the equipment in three to five years or over a longer period of time? If a company wants to keep the equipment for a long time, some companies offer buyout. Buyout comes with a fair-market-value purchase option. The buyout price is determined by computing what the initial investment was and the depreciation over the term of the lease.
-Will the equipment do what the business needs it to do in three to five years? With technological advances, major strides are being made in equipment; cost is coming down.
Many companies offer a straight-lease option and a lease/ cost-per-copy program. The straight lease is financed through the vendor, and companies have to pay extra for services and maintenance of the equipment; services are invoiced monthly. Only about 25 percent of companies who lease through supplier choose to purchase equipment at the end of it. Customers can end up paying the entire price of equipment anyways by the end of a lease. However, for those attuned to ever-changing technology or those in high-volume situations, it really is the best way to go.

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