Equipment leasing may be the option that you are looking for if you need equipment for your business but don't have money for the down payment. You can avoid having to come up with a large down payment with a lease. You may be able to finance 100% of the equipment cost. A lease is a way that you can obtain the equipment you need to operate your business by which you make a series of periodic payments for a term that you have contracted.
In this type of equipment leasing, you are the lessee as the receiver of the equipment and the company that provides the lease is called the lessor. The term of the lease may be fixed, periodic (as a seasonal business may require) or of indefinite duration. A fixed duration is probably the most common type of lease. The lease expires automatically when the term expires. There is usually no need for any action on the part of the lessee. A periodic term is one in which is renewed automatically, usually on a weekly, monthly or quarterly basis. This type of lease last can last as long as you want it. For example, if you are a contractor working on a large project whose completion date may be dependent on the weather or delivery of materials, you could lease the equipment needed to do the work on a periodic basis. If the project runs over a few days or weeks, your lease is automatically renewed at the end of each period until you return the equipment without penalty.
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There are some distinct advantages to equipment leasing as opposed to purchasing your equipment. If you purchase your equipment, you have to either use your own capital or get a loan. Either way you are tying up capital or credit that could be used in the operation of your business. Most lenders will require a down payment of 10 – 20% of the purchase price. On the other hand, an equipment lease agreement will require only 1 or 2 monthly payments in advance. Also your monthly payments can be more closely tailored to your cash flow. The costs of the lease can be deducted on your income taxes if taken as operating expense. Purchased equipment can only be depreciated over the useful life of the equipment. (Verify all tax-based decisions with your tax consultant or accountant)
If you purchase a piece of equipment and pay for it over the term of the loan, you could now own a piece of well-worn equipment that is three to six years old. Now you have to repeat the process and purchase a newer model. You also have to either dispose of the older equipment either by selling or use it as a trade-in on the new equipment. Either way it not the most effective use of your operating capital.
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