Leasing equipment is advantageous to your business in many ways. For example, leasing heavy equipment allows your business to select a fixed term with low upfront costs and the option to purchase the equipment at the end of the agreement. However, it’s important to be aware of the potential concerns, specifically pertaining to additional payments and penalties, that can arise at the end of a lease.
Understanding the issues related to extra costs and knowing how to properly address them can help you secure an attractive lease for your business. Ideally, your lease agreement shouldn’t present any major financial obligations at the end of the term.
One of the most basic ways to avoid additional costs at the end of your lease can also be difficult to prevent during a long-term lease. A common source of additional costs stems from the wear, tear, and damage equipment and machinery encounters during the life of the lease. Some wear and tear is inevitable due to the harsh applications and conditions that some equipment operates in. However, that doesn't mean wear and tear can’t be avoided.
Scheduling routine maintenance and developing procedures for employees who regularly use the equipment can help your business maintain a higher standard of care. Hard-working machines don't have to quickly fall into cosmetic or functional disrepair. Every industry and business is different. Regardless of specifics, properly maintaining your equipment can help you determine when, where and how your equipment is damaged. Plus, developing a plan to keep equipment in better shape can have a significant impact on the amount of extra payments you are responsible for at the end of a lease.
Choosing the right kind of lease for your operational and financial needs and the financial institution that provides you with the lease can greatly impact the total number of additional expenses you will be responsible for when the lease comes to an end. Working with banks offers many advantages, but including a third party in a lease tends to lead to increased costs and additional fees. Some want to make a profit off of these transactions, and others need this type of revenue.
Working directly with a captive financing company means that only two parties are involved, which translates to fewer unexpected costs. Leasing directly from a captive financing company provides several other benefits. The lessor is familiar with your industry and typically has a wide range of equipment available matched with the expertise to help you determine the best option for your business.
The different types of leases available to your business should also be carefully reviewed. A finance lease typically include the option to purchase the equipment at the end of the lease period. Flexible return or purchase options are offered when a mutually agreed period during the agreement is reached.
Finance leases differ from operating leases in how they're recorded on a company's ledger. A finance lease is counted as an asset, which also increases liability. This form of lease allows companies to claim the depreciation in value of the equipment itself on their taxes along with the interest expenses that come with the lease. In terms of fees, finance leases can have low final bargain purchase options and end-of-lease balloon payments - a major advantage in some situations.
An operating lease allows businesses to avoid carrying the assets and liabilities related to the equipment. Operating leases are considered a rental expense, which is beneficial in terms of receiving tax incentives. Operating leases can also provide an option to purchase the equipment at the end of the term, although the advantages in that respect aren't as strong as they are with finance leases. Seeking out an operating lease from a captive financing company is a very effective choice, depending on a business's needs.