When Does it Make Sense to Lease Equipment?

<h1>When Does it Make Sense to Lease Equipment?</h1>Author: <a title="Mark S Fackrell" href="http://www.articlesbase.com/authors/mark-s-fackrell/286327.htm">Mark S Fackrell</a> Leasing equipment has become very popular with small to mid-sized businesses in recent years. There are literally dozens of companies that will provide financing for equipment which seems unattainable with more traditional forms of financing. Herein lies the problem. When approaching your bank for equipment financing it will typically evaluate the financial health of the company as a whole. It will consider not only how the business "looks on paper" but will also draw on the relationship it has had with the business in the past, the strength of the management team and the ability of the enterprise to service the debt associated with the purchase. In essence it is not in the best interest of a bank to allow the business to get in too deep. This is not the primary concern of a leasing company. Leasing companies essentially gamble that the company is healthy enough to service the debt, and in the event it cannot they simply reposes the equipment, charge exorbitant fees and sell the equipment to another party. These companies care only about the value of the equipment they are financing not about the company they are lending the money to. Many businesses, after having been turned down for traditional financing, will turn to a leasing company as an alternative. This would be like purchasing a car with a credit card after a bank would not lend. If a business cannot secure traditional financing this should be a clear sign the business needs to take a more conservative approach improve profitability, liquidity and improve its balance sheet. Contracts with leasing companies are very restrictive and expensive. "Interest rates for capital leases are typically 20% - 30% higher than with loans "Fees are higher because there are usually one or more brokers involved "Prepayments/Early payments cannot be made "There is no way to reduce the total cost of the borrowing A capital lease contract provides that a company rents or leases equipment from the leasing company at the end of the contract it then purchases it from that company. This ensures that the leasing company receives a fixed amount of money, regardless of whether they have earned it or not. A typical bank loan will allow pre-payments of principle which will reduce total interest paid over the term of the loan. If your business already has capital leases there is very little you can do to recover the costs both past and future. The best course of action if you currently have these leases is: "If you are nearing the end of the lease, continue making the lease payment and then purchase the equipment "If you are not nearing the end of the lease negotiate the sale of the equipment to another party and have them assume the lease payments. The short answer is that it NEVER makes sense to lease equipment, if a bank will not lend the money you cannot afford it. About the Author: Mark Fackrell
CFO for Hire
Strategic Business Services
<a target="_blank" href="http://www.tfgboise.com">http://www.tfgboise.com</a>Article Source: <a href="http://www.articlesbase.com/">ArticlesBase.com</a> - <a href="http://www.articlesbase.com/fundraising-articles/when-does-it-make-sense-to-lease-equipment-1456024.html" title="When Does it Make Sense to Lease Equipment?">When Does it Make Sense to Lease Equipment?</a>

Leasing equipment has become very popular with small to mid-sized businesses in recent years. There are literally dozens of companies that will provide financing for equipment which seems unattainable with more traditional forms of financing.

Herein lies the problem. When approaching your bank for equipment financing it will typically evaluate the financial health of the company as a whole. It will consider not only how the business "looks on paper" but will also draw on the relationship it has had with the business in the past, the strength of the management team and the ability of the enterprise to service the debt associated with the purchase.

In essence it is not in the best interest of a bank to allow the business to get in too deep. This is not the primary concern of a leasing company. Leasing companies essentially gamble that the company is healthy enough to service the debt, and in the event it cannot they simply reposes the equipment, charge exorbitant fees and sell the equipment to another party.

These companies care only about the value of the equipment they are financing not about the company they are lending the money to. Many businesses, after having been turned down for traditional financing, will turn to a leasing company as an alternative.

This would be like purchasing a car with a credit card after a bank would not lend. If a business cannot secure traditional financing this should be a clear sign the business needs to take a more conservative approach improve profitability, liquidity and improve its balance sheet.

Contracts with leasing companies are very restrictive and expensive.

"Interest rates for capital leases are typically 20% - 30% higher than with loans
"Fees are higher because there are usually one or more brokers involved
"Prepayments/Early payments cannot be made
"There is no way to reduce the total cost of the borrowing

A capital lease contract provides that a company rents or leases equipment from the leasing company at the end of the contract it then purchases it from that company. This ensures that the leasing company receives a fixed amount of money, regardless of whether they have earned it or not. A typical bank loan will allow pre-payments of principle which will reduce total interest paid over the term of the loan.

If your business already has capital leases there is very little you can do to recover the costs both past and future.

The best course of action if you currently have these leases is:
"If you are nearing the end of the lease, continue making the lease payment and then purchase the equipment
"If you are not nearing the end of the lease negotiate the sale of the equipment to another party and have them assume the lease payments.

The short answer is that it NEVER makes sense to lease equipment, if a bank will not lend the money you cannot afford it.

Mark Fackrell CFO for Hire Strategic Business Services http://www.tfgboise.com

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Article Tags: Equipment, Leasing, Business Financing

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