A Guide to Equipment Leasing

By Michael J. Fleming

A commonality between all businesses, regardless of industry, is the need for equipment. The type of equipment varies from business to business. It can range from computer equipment to point of purchase items, from office equipment to medical equipment, from construction equipment to telephones. Regardless of the type of equipment you need in order to operate and grow your company, every business executive faces the same challenge...financing. How do you pay for these required overhead items?

Four primary financing options exist when acquiring a new capital asset-cash, loan, line of credit and leasing. Of all the ways to obtain equipment, leasing is the method most frequently used. According to the Equipment Leasing Association (ELA), eight out of 10 U.S. companies lease their equipment. These businesses, which range from start-ups to Fortune 500 companies, recognize that the real value of equipment comes from using it, now owning it.

How does leasing work?

There are two ways you can acquire equipment through leasing:

1. You can select the equipment through a vendor or a manufacturer that offers leasing through its own subsidiary or a third-party financier.
2. You can select and order the equipment and then seek financing through a lessor.

In most cases, the equipment is selected and ordered before contacting the lessor. Unless provided for in the provisions of the lease, lessors do not normally provide equipment warranties. Equipment warranties are between the lessee** and the manufacturer.

By signing the lease, you assign purchase rights to the lessor, who already owns or who then buys the equipment as specified by you. When the equipment is delivered, you formally accept it and ensure it meets all specifications. The lessor pays for the equipment, and the lease takes effect.

What should I look for in a lessor?

Your choice of a financing company is an important one. You will want to study the company carefully, evaluating how it can meet your financial and strategic objectives and ensuring that you get the best possible leasing program. Factors to consider include:

* How well does the company understand your business? Is it familiar with the different types of equipment?
* Does the company provide a variety of tailored products to meet your individual needs?
* Does the leasing plan offer realistic terms that address your budget needs? * Does the financing structure improve cash flow?
* Will the end-of-lease options meet your future needs?

As in all relationships, good communication is the key to establishing a successful partnership with a lessor.

How do I know if leasing is the best option?

ELA recommends businesses ask the following 10 questions before signing a lease. These questions take into account the before, during and after stages of a lease.

Top 10 Questions You Should Ask Before Signing a Lease

Before
1. How am I planning to use this equipment in my business and how long will I need it?
2. Does the leasing representative understand my business and how this transaction helps me do business?

During
3. What is the total lease payment and are there any other costs that I could incur before the lease ends?
4. What happens if I want to change this lease or end the lease early?
5. How am I responsible if the equipment is damaged or destroyed?
6. What are my obligations for the equipment (such as insurance, taxes and maintenance) during the lease?
7. Can I upgrade the equipment or add equipment under this lease?

After
8. What are my options at the end of the lease?
9. What are the procedures I must follow if I choose to return the equipment?
10. Are there any extra costs at the end of the lease?

The Bottom Line

There are many means to achieving your business objectives, especially in the equipment financing market. As you evaluate what capital assets your business will acquire in the next 12-24 months, take the time to explore your options. With the right information, you gain the ability to assess the costs and benefits of various financing products, including leasing, and learn how to use this ever-growing option to add to your business financial performance. To learn more about leasing, visit the Equipment Leasing association's Web site at: http://elaonline.com

*Lessor: The party to a lease agreement who has legal or tax title to the equipment, grants the lessee the right to use the equipment for the lease term and is entitled to the rentals.
**Lessee: The user of the equipment being leased.

About the author

Michael J. Fleming is the president of the Equipment Leasing Association of America (ELA). The Equipment Leasing Association of America (ELA) is a nonprofit organization headquartered in Arlington, Va., representing over 800 member companies, which provide a variety of asset-based financial products, primarily equipment leasing.