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Business banking: How does equipment leasing work?

Reading time: 3 mins

Equipment leasing is an easy, immediately cheap and widely available way to get business equipment with little initial investment. Businesses of all sizes in all industries are routinely leasing whole or part of their equipment, so why wouldn’t you do the same? Before you commit to a contract, there’s a few things which you need to know about leasing, like how to avoid contractual loopholes, and how to know if this kind of financial product is good for your business.

 Equipment leasing

Understanding equipment leasing

Equipment leasing is a way of obtaining the use of business equipment without having to buy it. It is now offered by many different types of leasing providers.

What is equipment leasing?

With this method, businesses can obtain the use of business equipment without having to buy this equipment, but by paying monthly instalments at fixed rates and choosing at the end of the contract whether you want to acquire the goods or not. This method is therefore not buying, because you don’t own the leased goods, not like renting because you can still acquire the goods at the end of the contract, and not like credit because it is not based on a loan. Any kind of equipment can be concerned, from PCs to machine tools to vehicles, and at the end of the contract, businesses either choose to pay a little premium and acquire the good, or return it, or have it changed with another piece of equipment.

Who provides it?

This method is now so popular that many different types of providers have emerged:

- banks and other financial institutions,

- equipment dealers and distributors, either through independent leasing companies or through captive leasing companies which are subsidiaries of the manufacturers,

- brokers.

Avoiding loopholes

Before jumping on the opportunity to start a contract, interested businesses should make sure this is really the right option for their business type, and also make sure that they have actually understood the contract to avoid possible loopholes.

Is your company right for equipment leasing?

Even if companies of all sizes, from all industries resort to this type of equipment financing, some companies may find more benefits than others in this practice. Small enterprises hiring a small workforce will be interested as equipment stays while the staff may be renewed and numbers move up quickly. Start-ups with little credit history, on the contrary, may not be eligible for these arrangements, unless the owner can supply his own credit history.

Have you really understood the contract?

One key phase of the leasing agreement is the end of the contract, and what you do with the equipment at this time. With closed-end leases, nothing is owed when the lease period takes an end. With an open-end lease, leasing providers may require to pay a premium to cover the difference in value of the equipment, or its depreciation during the lease period.  Balloon payments also require users to pay a large “balloon” at the end of the lease period, in exchange for smaller monthly payments. This “balloon” payment can be worth more than the retail value of the equipment itself.