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Equipment Leasing Tips

Simple Alliance, Kenya Limited


Definition

Leasing is an important business financing aspect. It gives you, the lessor, certain property rights.  The leased equipment still belongs to the leaseholder – the leasing company.  The lease payments you to the lease companies make allow you to use the equipment. 

Why Lease?

To Procure Equipment When Cash is Scanty

Suppose you need to acquire new equipment for your business. Suppose you lack the necessary money. Equipment leasing could serve as an economical option. You would seek available leasing services from lease companies.  

To Effectively Regulate Cash Flow

You could even opt for leasing even when you have the cash for purchasing needed equipment. The benefits you derive from this initiative include:

  • Better cash flow control as you pay regular monthly lease amounts other than making one large expenditure  
  • You could use the money saved for other business operations
  • You do not ties up lines of credit

Methods of Acquiring Assets via Leasing

The main approaches include:

  • Acquiring your equipment directly from a lessor
  • Identifying equipment then seeking financing via a lessor  
  • Arranging for lease terms with a manufacturers or retailer with lessor subsidiaries  

Organizing for a Lease Relationship with a Producers or Trader with lessor Affiliates  

After talking with the trader or producer, you agree on a selling price with their subsidiaries. The subsidiaries then convert the price into a lease arrangement based on your pre agreed terms.

Acquiring your Equipment Directly from a Lessor

Here, the lessor provides the equipment and sets up the lease.  You engage the lessor to establish your needs and your financial capacity. Prior to formalising the agreement, you would do well to seek technical advice from various other third parties. 

Finding Equipment then Looking for Funding via a Lessor 

With this method, you locate desirable equipment at a vendor’s store. You then make a lease pact with a leasing company. The vendor offers you needed service and support.   

Merits of Leasing

Some advantageous factors relate to:

  • More lenient terms
  • Tax issues
  • Ownership

Ownership

After expiry of lease, you do not own equipment. This could be advantageous especially with equipment such as computers.  The technology needs of computers change very rapidly.

Taxation

Leasing permits you to treat your equipment costs as expenses. You thus subtract lease payments as business costs. Alternatively, buying permits you to subtract a certain amount of cash in the year your purchase equipment. Further costs are treated as year-by-year depreciation amounts. These yearly depreciation deductions could misrepresent product value.  

More Lenient Terms

As compared to loans, leases are granted on more lenient terms. Banks could request your financial records for two to three years. Conversely, most leasing companies usually require your financial records for about 6 months. These term differentials make leases friendlier to start-up businesses.  

Disadvantages of Leasing

Leasing presents several demerits which relate to factors like:

  • Ownership  
  • Total expenditure

Full Costs

Provided you can acquire equipment without procuring a loan, leasing is nearly always more costly than buying. This is due to the consistent monthly payments associated with most lease agreements.

Ownership 

After your lease period expires, you do not own the equipment. This could be disadvantageous particularly with assets like buildings and land which generally gain value over time.  

Issues to Consider with Leases

Before signing for a lease, or during the lease period, you need to consider various factors, including:

  • Total expense
  • Lease term
  • Assignment clause
  • Cancelation clause
  • Service terms
  • Modern equipment substitution

Total Expenditure

Look at the costs your will bear throughout the lease term. Some common expenses include:

  • Repairs
  • Service
  • Insurance cover
  • Monthly payment
  • Security deposit
  • Initial down payment

Termination Clause

Check for the penalties you will bear if you prematurely end the lease. Some cancellation grounds include:

  • Business closure
  • Business focus change
  • Not needing equipment    

Up-to-date Equipment Switch

Check whether you have the leeway to update or exchange old for current equipment. This provision would allow you to avoid using obsolete equipment.

Lease Term

Normally, lease terms range between 1 and 3 years. Some length factors to look into include:

  • Short leases charge high rates and vice versa
  • Long lease terms could prevent you from adapting to changing technology

Service Policy

Establish if the lease has an onsite service plan. Determine the length of the plan. Ascertain the exact service date.  

Assignment Clause

Investigate if you can hand over the lease to a third party. Determine the associated expenses.  

Leasing is a useful business financing element. Some circumstances could lead you to opt for leasing services as opposed to buying business equipment. Equipment leasing helps protect your cash flow. It allows you to use the saved cash for other business activities. It allows you to easily adapt to changing technology. Before signing a lease agreement, you need to make out certain issues with the leasing company. You need to investigate the provided lease term. Your lease company will avail this information. You also need to determine if the lease has provisions for assignment, onsite service, modern equipment swaps, or cancelation. Further, be sure to investigate the total expense of the lease. These considerations will enable you to make proper, economically sensible decisions.

Copyright (C) 2016, Simple Alliance Kenya Limited

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