Equipment Lease Financing – A World of Options

  November 2, 2012

  Read Time: 1 min 50 sec

Here’s How to Leverage the Inherent Flexibility of Leasing to Close More Equipment Transactions
If you open your wallet or your purse – literally, not figuratively – you will probably find, among other things, an assortment of payment methods. There will most likely be some cash and a debit card tied to your checking account, or one for each checking account, as the case may be. You also probably carry a credit card or several, each with a specific spending limit.

The point is that when it comes to paying for something today, you try to give yourself some options. Most people believe that paying cash for things isn’t always the best approach. It’s often easier to use the debit card and for some purchases, it makes sense to spread the payments out over a period of time on a credit card.

Businesses seeking to acquire equipment approach the process in the same way. When a business owner, manager, or executive decides that new equipment is needed, rarely do they also decide to commit what can easily be a sizable amount of cash to pay for it. Since cash is the lifeblood of any business, savvy business operators understand that conserving it is a top priority.

The same thing holds true for credit lines, which are often held in reserve to augment working capital during seasonal shortages or to cover unexpected, business-critical expenses that arise unexpectedly. Equipment leasing, on the other hand, is another – and very important – payment method in the figurative wallet of business, because it preserves both cash and existing credit lines.

One of the most obvious benefits of leasing is that there are no large, up-front cash payments. Leases often require no down payment and can often be structured to defer the first payment for up to 90 days. This allows the business to start using the equipment to generate revenue before the payments even begin.

Apart from eliminating up-front cash requirements, lease financing is also an excellent way to address the variable payment needs of a business, kind of like the way a new and very flexible credit card can improve the purchasing power of someone’s wallet. An equipment lease can be structured to meet the individual cash flow needs and seasonal sales variations of just about any business.

By combining and configuring the components of an equipment lease agreement, an equipment vendor can offer a customer a wide range of payment and equipment ownership options. For example, if a customer simply wants to walk away from the equipment at the end of the lease – or perhaps intends to upgrade the equipment along the way – a fair market value (FMV) lease provides that option, along with the option to buy the equipment for its market value at lease end. This option also provides the lowest payment factor as well.

On the other hand, the $1-out option is the solution if the customer wants to lease equipment but then wishes to own it at the end of the contract. Payments can also be adjusted by varying the term of the lease, typically anywhere from 12 to 60 months and in some cases even longer.

Leasing offers other advantages. Businesses often worry about investing heavily in equipment that becomes obsolete well before its useful life ends. When this happens, the business generally holds on to the equipment in order to fully depreciate the investment, even though there is newer, improved, more effective equipment available. Not only is this situation frustrating, but it can also become a competitive disadvantage in the marketplace.

An equipment lease can completely eliminate this problem by allowing a company to turn in old equipment and acquire new equipment when it becomes available, simply by updating the existing lease contract. This can be done indefinitely, effectively insulating a business from the threat of having to live and work with outdated equipment. Particularly for businesses that use technology-based equipment that tends to evolve rapidly, leasing makes much more sense than actually buying equipment.

Equipment leases can also be bundled to incorporate not only the equipment itself but also the services and supplies necessary to install, integrate, and operate it. So instead of negotiating prices and rates, as well as writing checks every month to several different vendors, a business gets everything it needs as part of the lease contract and makes one simple monthly lease payment.

The short version of this is that lease financing not only makes good business sense, but it can help to close more transactions as well. The best way to do this is to introduce the lease financing option early on in the sales cycle. Once a customer sees the inherent flexibility in leasing – not to mention a low monthly payment – the decision about moving forward with an equipment acquisition transaction becomes a much easier one to make.

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