Should You be Leasing Technical Equipment
One of the biggest expenses that any enterprise faces is the purchase of new technical equipment. Given the cash crunch in most small businesses, outright purchase of new equipment might not be feasible. Added to that is the fact that computers and other technological equipment quickly become obsolete. A growing small business may need to refresh its technology in some areas every eighteen months, but investing in the latest gadgetry may be beyond its means. In such a situation, is leasing the best way out?
We’ve put together a primer of the advantages and disadvantages of leasing technical equipment and also the factors you need to consider before making the decision.
Advantages:
o Leasing technical equipment offers you a way to keep it up-to-date. Computer technology becomes outdated sooner than you know. With a lease, you do not have to worry about that. For example, let's say you have a two-year lease on a printer. Once that lease expires, you can lease the latest version of that printer.
o You will have predictable monthly expenses. You will know exactly how much you have to pay each month, and that can help you budget more effectively.
o Many small businesses struggle with cash flow and because leases rarely require a down payment, you can acquire new equipment without tapping into your precious funds. Instead, that cash can be deployed in marketing, advertising or other functions that can help grow your business.
o Leasing technical equipment can enable your small business to acquire sophisticated technology such as a voice over internet protocol (VoIP) phone system, which might not be affordable otherwise.
Disadvantages:
o Leasing is almost always more expensive than purchasing, especially if it’s long term. You pay more in the end because when you add up the monthly payments, the total will invariably be higher than the actual cost of the equipment.
o Some leases may have strict terms which require you to make payments for the entire contracted lease period even if you wish to return the equipment earlier.
Before you make the decision about leasing technical equipment for your small business, here are a few factors that you would do well to consider:
• Type of lease – There are two types to choose from: a capital lease or an operating lease. A capital lease is similar to a loan. The equipment that you lease is considered an asset on your balance sheet, and you take the benefits such as tax depreciation and risks including obsolescence of ownership. With an operating lease, the leasing company retains ownership, and for tax purposes, the equipment is considered a monthly operating expense rather than a depreciable asset. Operating leases are generally more popular among small businesses because they don't tie up funds and are usually short-term.
• Buyout option – There are two options available to you - a fair-market value (FMV) option and a $1 buyout option. FMV means you can buy the equipment at the end of the lease at its fair-market value. A $1 buyout option means the equipment is yours for $1 when the lease expires. The monthly payments on FMV leases are usually lower than on $1 buyout leases.
• The length of the lease – Typical leases for computer equipment run 24, 36 or 48 months. The longer your lease, the lower your monthly payments will be, but you are also likely to pay more over time with a longer lease.
• Insurance for the equipment – Some leasing companies require you to insure the leased equipment. If not, a charge may be added to your monthly payment to cover the cost of insurance.
• Termination options – You may not need the equipment you are leasing after a point or you might want to upgrade to newer technology sooner than you expected. Find out if you can pay off your lease early, and if there's a prepayment penalty.
The main criteria while leasing technical equipment should be whether you can afford to tie up a large amount of cash which could otherwise be used to establish or grow the business. Consider the pros the cons of leasing and figure out how it will affect the running of your business before you make that call.
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