Equipment Leasing
Equipment leasing is a financial tool used by over 80% of businesses to acquire pieces of capital equipment. The Equipment Leasing Association of America estimated that in 1999, over $226 billion in equipment was leased by US businesses. The flexibility and low out-of-pocket costs that equipment leasing affords are two major reasons so many businesses turn to equipment leasing as a means to acquire equipment. Two other reasons often cited include tax benefits and the ability to avoid technology obsolescence.
Equipment leasing is basically a long-term rental agreement where the equipment leasing company (lessor) purchases the equipment and then leases back to the lessee at fixed monthly payments, for a predetermined term. These days, equipment leasing programs can be customized to match seasonal fluctuations in cash-flow and used to cover nearly any piece of new/used equipment, across nearly every industry. Equipment leasing options are available for both traditional business entities, as well as for freelancers and self-employed business professionals.
Benefits of Equipment Leasing
● 100% Financing- Equipment allows traditional "soft costs" such as installation, freight, training, and licensing to be included in the financed amount. This helps to further reduce initial out-of-pocket costs.
● Minimal Cash Outlay- Lets face it... cash is king! Equipment leasing allows you use of capital generating equipment, without the huge cash outlay associated with a cash purchase. Typically, only the first and last month's lease payments are taken in advanced. Compare this with the traditional 15% cash down, or compensating balances often required by banks to initiate loans and credit lines.
● Stay Current With Technology- In today's fast-paced business world, the ability to stay one-step ahead of the technology curve is a must! Equipment leasing allows for some of the most flexibly equipment financing terms available, allowing your business to upgrade equipment at set intervals down the road. Equipment leasing will allow your business to better manage cash-flow, while staying current with constantly changing technology.
● Fixed Payments- Given the current economic environment, the luxury of having long-term fixed payments can give you and your business much needed peace of mind. Equipment leasing payments are fixed for the entire term and will not change with constantly fluctuating interest rates.
● Tax Benefits- Depending on your lease end-option, the possible tax benefits that equipment leasing affords can be immense. Qualified equipment lease payments can be expensed in their entirety, as they are made. Please consult your CPA or tax professional for more information on possible tax benefits for your unique business needs.
Equipment Leasing End-Options
When arranging an equipment lease, one of the most important decisions a business can make is regarding the lease end-option. There are three basic equipment leasing end-options that you'll see when applying for financing:
$1.00 Buy Out- With a “plain English” purchase option, the lessee must purchase the equipment for $1.00 at the end of the equipment lease term. The $1.00 (or $101 for tax purposes in some state) purchase option is also known as a “full payout lease” or a “disguised purchase.” This is an ideal option for business that KNOW they would like to own the equipment at the end of the lease.
10% PUT- A “PUT” (balloon), is a pre-determined end-option based on 10% of the original financed amount. This allows the lessee to enjoy lower payments through the term of the lease, while still giving them the peace-of-mind knowing they still have a GUARANTEED end-option amount. This is ideal for businesses that know they want to own the equipment at the end of the lease term, but want to enjoy lower monthly payments.
FMV (Fair Market Value)- An equipment lease structured with a FMV purchase option is perfect for any company seeking the MAXIMUM tax and accounting benefits that an operating lease can provide. Often times, the entire monthly lease payment can be deducted as an operating expense. This can greatly reduce tax liability at the end of the year. A business with a FMV lease has the option to purchase the financed equipment at the end-of-lease, at its current fair market value. FMV equipment leasing allow for the lowest monthly payments.
By far, the most popular equipment leasing end-option utilized by businesses is the $1.00 buy-out. Whatever end-option your business might choose when making it's equipment leasing decisions, be sure and make a copy of the document for your own business records and accounting purposes.
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