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Equipment Leasing Guide- Part 2
In Equipment Leasing Guide-Part 1, you were informed about benefits of equipment leasing, equipment that can be leased, and how to evaluate and select the best equipment leasing company. Equipment Leasing Guide- Part 2 provides you information about the types of equipment leasing programs, end-of-lease options, and some basic tips for equipment leasing.
Types of Equipment Leasing Programs
Equipment Leasing Deferred Payments : The equipment leasing deferred payments option is very attractive for various small and new companies that need the equipment today to generate profits tomorrow. 90 days deferred payments option is structured such that in the initial few months you have to make nominal or no payments. The payments can be made once the revenues start pouring in.
Seasonal Payments : Seasonal payments option helps you to meet seasonal fluctuations effectively and can be streamlined as per your cash flow situation. You can pay more during the season and less during slow months without being penalized. Such equipment leasing seasonal payments option is ideal for agriculturists, recreation businesses and schools that rely heavily on specific time of the year to earn significant proportion of their revenue and stay burden free during the rest of the time. You can also choose to pay quarterly by choosing the quarterly payments option.
Equipment Leasing Step Down Payments and Step up Payments : According to equipment leasing step down payments program, the lessee has to make larger initial monthly payments. The payments are then reduced over time. This type of payments program is ideal for businesses that wish to pay less interest over the entire lease term.
According to step-up payments program, the lessee has to make small payments in the initial months and the payments increase according to pre-determined schedule over the term of the lease. This payment option is best for new growing businesses that need new equipment to make profits and grow, and can make payments for it once the revenues increase.
True Lease or Fair Market Value Lease : Also known as operating lease and tax lease, this is a standard lease agreement which offers you multiple options at the end of the lease like purchasing the equipment at fair market value, upgrading, renewing and returning the equipment. It is an ideal lease program for those who are concerned about product obsolescence. Generally, the payments on true leases tend to be lower and one can write off 100% payment as an operating expense in the balance sheet.
Finance Lease : The finance lease program allows the lessee to buy the equipment for a nominal fee at the end of the lease. The lessee can also trade–in for new equipment or sell the equipment at the end of the lease term. In simple words, with finance lease-the lessee gets the opportunity to borrow the funds and acquire the asset to be depreciated. In this payment option, monthly payments are structured such that the full value of the equipment is received. Finance lease end of lease options are 10% purchase and $1 Buyout. Finance lease is considered an asset and is capitalized on the lessee’s balance sheet.
Master Lease : By choosing master lease, you qualify to make several purchases at a discounted rate of interest. The lessee has only one lease agreement to sign and acquires one asset; the terms and conditions remain the same for acquiring other assets as well without negotiating a new contract.
End-of-Lease Options
Lease term usually ranges from 12-60 months. The deciding factor for the lease term is usually predicting what state the equipment will be in at the end of the lease. Generally four options are available at the end of the lease:
- Return the equipment
- Keep the equipment and renew the lease agreement
- Upgrade to new equipment
- Purchase the equipment for a nominal fee or at fair market value
Before selecting the end-of-lease option, decide meticulously what option will suit your financial and equipment needs the best. In case, you decide to escape from the lease early, check that whether or not you will be liable to pay a substantial penalty fee for early withdrawal.
Tips for Equipment Leasing
• Equipment leasing is a form of borrowing and involves interest payment. Therefore, the best way to lower lease payments is to topple the purchase price of the leased equipment. You must use your negotiating skills to bring down the purchase price.
• You can also try to lower down the interest rates. The interest rate generally depends on factors like credit worthiness, size of lease, trading background, and many others. By providing complete documents, you can negotiate to get lower rates.
• Search for experienced brokers on the Internet or ask referrals to locate a reliable equipment leasing broker. Pick the one that best understands your needs.
• Choose a lease program based on the lease pricing, balance sheet considerations, equipment obsolescence, equipment usage, lease flexibility, and your company’s credit status.
• Do consider all the fees associated with equipment leasing before entering into a contract. The various fees like attorney fees, commitment fees, documentation fees, penalty charges for late payments, facility fees, early lease termination charges, lease rentals, etc. can add up a lot to your actual lease payments. |
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