In today’s competitive business landscape, having access to the right equipment is crucial for success. However, acquiring the necessary equipment can pose a significant financial challenge for many businesses, especially startups or those operating on a tight budget. That’s where equipment finance comes into play.
- What Is Equipment Leasing
- Advantages
- Disadvantages
- How Equipment Leasing Works
- What Happens at the End of the Agreement
- Types of Assets You Can Finance
- Potential Tax Benefits
What Is Equipment Leasing
Equipment leasing is a financial arrangement wherein a business obtains the right to use equipment for a specified period in exchange for regular payments to the lessor, who retains ownership of the equipment.
Instead of purchasing the equipment outright, businesses can lease (or rent) the equipment for a predetermined period, allowing them to access the necessary tools and machinery without the burden of high upfront costs. This financial tool enables companies to conserve their working capital and allocate resources more efficiently.
✅ Advantages
- Cost-effectiveness: Equipment leasing eliminates the need for substantial upfront capital investment. Your business can acquire the necessary equipment by paying regular lease payments over a set period, preserving its working capital for other essential business operations.
- Access to state-of-the-art equipment: Your business can access the latest equipment and technology, which may be financially out of reach for purchasing outright. Allowing you to remain competitive and stay at the forefront of your industry by utilizing cutting-edge equipment.
- Flexibility: There is flexibility regarding lease terms and equipment upgrades. You can tailor the lease period for your business’s specific needs, whether short-term leasing for a particular project or long-term leasing for ongoing operations. Additionally, leasing allows for easy equipment upgrades or replacements as technology advances or business requirements change.
- Preservation of working capital: You can preserve your business’s working capital for other essential business needs, such as marketing, inventory, or hiring additional staff. This improves cash flow and provides more financial flexibility to support your business growth.
- Less Risk: The leasing company carries the risk if the equipment breaks down
- Tax benefits: Equipment leasing may offer potential tax advantages for businesses. Lease payments are often considered operating expenses and can be deducted from taxable income, reducing the overall tax liability.
❌ Disadvantages
- Higher overall cost: Equipment leasing provides immediate access to equipment without substantial upfront costs, but it may result in a higher overall cost than purchasing the equipment outright. Lease payments accumulate over time and can exceed the original purchase price of the equipment.
- No ownership rights: With equipment leasing, businesses do not own the equipment. This means they do not benefit from any potential appreciation in value, and they may have limitations on modifications or customization of the leased equipment. The lessor retains ownership throughout the lease term.
- Potential contractual obligations: Lease agreements may come with specific contractual obligations, such as maintenance responsibilities or insurance requirements. Businesses must carefully review the lease terms to understand their obligations and ensure compliance throughout the lease term.
Find out how much you could finance using our free online asset finance calculator →
How Equipment Leasing Works
Throughout the lease term, the lessor remains the legal owner of the equipment, while the lessee has the right to use it in exchange for the agreed-upon lease payments1.
1. Identify the Equipment
You identify the equipment your business needs to lease to support its operations. This could be anything from office equipment like computers and printers to specialised machinery used in manufacturing or construction.
2. Lease Application
Your business submits a lease application to your chosen lessor, providing necessary details such as the type of equipment, desired lease term, and financial information. The lessor will evaluate your application, assess your business’s creditworthiness, and determine whether to approve the lease.
3. Lease Agreement Negotiation:
If the lease application is approved, you and lessee negotiate the lease agreement terms. This includes factors such as lease duration, monthly payment amount, and any additional terms and conditions specific to the equipment being leased.
4. Equipment Delivery and Acceptance
Once the lease agreement is finalised, the lessor procures the equipment and delivers it to your business. You inspect the equipment to ensure it is in proper working condition and meets your businesses requirements. Any discrepancies or issues are communicated to the lessor for resolution.
5. Commence Lease Payments
You begin making regular lease payments to the lessor as per the agreed-upon terms. These payments typically occur monthly and cover the use of the equipment during the lease term.
6. Equipment Use and Maintenance
You are responsible for using and maintaining the leased equipment according to the terms of the lease agreement. This may include routine maintenance, repairs, and adhering to any usage limitations specified in the agreement.
7. End of Lease Options
At the end of the lease term, you have several options depending on the agreement terms. These options may include:
- Return the Equipment
- Purchase the Equipment
- Renew the Lease
- Upgrade the Equipment
When you use a finance broker this process is made even easier, becuase their role is get the best deal for you so that you don’t need to worry about shopping around. You can read up more on what an asset finance broker does.
What Happens at the End of the Agreement
Return the Equipment
You return the equipment to the lessor, and the lease agreement concludes. You no longer have any further obligations or rights to the equipment.
Purchase the Equipment
In some cases, the lease agreement may allow you to purchase the equipment at a predetermined price. This allows your business to acquire ownership of the equipment after the lease term.
Renew the Lease
If your business still requires the equipment, they may have the option to renew the lease for an additional period. This allows continued use of the equipment with updated lease terms.
Upgrade the Equipment
Some lease agreements may provide an option for you to upgrade to newer equipment models or more advanced technology. This allows your business to stay up-to-date with the latest equipment offerings.
Types of Assets You Can Finance Through Equipment Leasing
Equipment leasing covers a broad range of assets across various industries. Here are examples of common assets that can be financed through equipment leasing:
- Manufacturing equipment: Machinery, production lines, packaging equipment, and specialized tools used in manufacturing processes.
- Office equipment: Computers, laptops, printers, copiers, telecommunications systems, and other office essentials.
- Medical equipment: Diagnostic machines, imaging equipment, patient monitoring systems, and other medical devices used in healthcare facilities.
- Construction equipment: Excavators, bulldozers, cranes, loaders, and other machinery used in construction projects.
- Restaurant and catering equipment: Commercial ovens, refrigeration units, industrial mixers, and other equipment used in the foodservice industry.
Potential Tax Benefits of Equipment Leasing
Equipment leasing may offer tax benefits for businesses in the United Kingdom. It’s important to consult with a tax advisor or accountant to understand the specific tax implications and benefits applicable to your business. Some potential tax benefits of equipment leasing include:
- Tax-deductible lease payments: Lease payments made for equipment leasing are often considered operating expenses and can be deducted from taxable income, reducing the overall tax liability.
- Offsetting against profits: Lease expenses may be offset against business profits, reducing the taxable profit amount and the associated tax liability.
Conclusion
Equipment leasing provides businesses in the United Kingdom with a flexible and cost-effective solution for accessing necessary assets without substantial upfront costs. By leveraging equipment leasing, businesses can enjoy cost-effectiveness, access to state-of-the-art equipment, flexibility in lease terms, preservation of working capital, and potential tax benefits. However, it’s important to consider the higher overall cost, lack of ownership rights, and potential contractual obligations associated with equipment leasing.
If you are interested in taking advantage of the benefits of equipment leasing, contact us or even use our free online asset finance calculator to find out how much you could borrow.
info@dorsiafinance.co.uk | 01522 420 420