Leasing is a technique of financing equipment and has been in use for a long time. There are many benefits associated with leasing equipment over bank financing or outright purchases.
Major reasons for equipment leasing
Lease payments are usually fixed for the period agreed in most cases. This is a key advantage over bank loans and purchase where interest rate are normally based on the floating rate. Knowing what to payment to make in advance facilitates the ease of budgeting and reduces the risk of interest rate.
Some equipment types when purchased can be obsolete within two years. Leases give provisions for upgrading the equipment economically during the last leap year thus giving the company an obsolescence protection. Even though the leasing company still holds the equipment title, the vendor is allowed by the contract to provide trade-ins on the equipment in question.
No down payment
Banking institutions require some down payment before they can finance most equipment. In lease transactions, however, the whole amount is financed with the first and last payment required during the lease inception time. In some situations, when the financial situation of a company is insufficient to support the lease amount, then a small payment may be necessary.
Working capital conservation
The main reason why most people lease equipment today is because of working capital conservation. During lease financing, the working capital is normally freed up for use in the daily business operations like inventory purchase, trade shows, hiring employees and advertising. Lease thus essentially allows companies to lower the invested amount in depreciating assets and use it to generate higher returns.
Bank credit lines preservation
No company will want to operate at the top of the credit line hence they are often reluctant to involve the banks in increasing their credit lines. It is wise that companies have business practices that will make sure there are funds for unexpected slow months or quarters, damage claim or unpaid receivables. Leasing will create a credit facility without affecting the relationship with the bank.
Enhances corporate image
Vehicles and equipment in the line of production all usually have a significant impact on the image of a company. By leasing these assets, they get to look fresh, new and create a picture for successful companies.
Leasing is a means of acquiring equipment, and this is why the manufacturer of equipment normally start their leasing arms as a way of helping their customers in the acquisition of products efficiently.