Leasing is a great alternative to funding your business expansion or equipment replacement programme.
Several factors can determine the decision whether to lease or buy and leasing can bring several advantages, which I outline below.
1. Preserves cash and spreads the cost of equipment over time, usually 3-5 years
2. Allows for updating equipment that gets obsolescent fast such as computers
3. Get a fixed interest rate rather than a floating one and can cost less than a bank loan
4. Repayments are fixed and allows for better cashflow planning
5. Soft items such as training and software implementation can be packaged into leases
6. Certain leases can be kept off the balance sheet which reduces the debt liabilities shown
Of course, there can be disadvantages to leasing as well and the main ones are that the total payments on a lease will obviously cost more than the original equipment cost and you’re stuck with the equipment for the term of the lease.
If you do go ahead with leasing, it’s worth asking if it is a finance or operating lease. The simple explanation is that with a finance lease, you have the option to own the equipment at the end of the lease period and with an operating lease the leasing company owns the equipment.
There are advantages to both depending what the equipment is and how long you can use it – the longer the use without obsolescence, it’s better to use a finance lease and for items such as computers and peripherals, it’s better to go for an operating lease. Operating leases can be cheaper since the lessor will build in some residual resale value at the end of the lease period.
Startups will find it difficult to obtain lease funding with no cash flow history but there maybe circumstances where leasing companies would consider them.
Whatever type of lease you enter into, check the interest rates being charged, the terms and conditions of the lease and the leasing company you’re dealing with. The more established and bigger the leasing company , the better.