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How Does Equipment Leasing Work

Posted by Ryan Hendrie on 23/01/18 10:18

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Leasing works like a rental agreement. You pay the equipment’s owner a set fee every agreed period and you can use the asset as though it was your own. Under a lease, nobody else can use the equipment without your permission and for all intents and purposes, it’s as though you own the piece of equipment.

Furthermore, the original owner of the equipment, your lease provider, cannot take repossession of the equipment - or “asset” - until the agreement finishes assuming you comply fully with it. There may be clauses where either party can break the lease agreement short of the full duration, but there will be associated penalty charges or other accommodations.

But, in short, equipment leasing works by allowing a party to pay a rental fee each month, quarter or year, in exchange for sole use of an asset. There’s no huge outlay of capital to purchase the asset outright and no balloon payment in order to take ownership at the end of the agreement as under hire purchase.

The duration of lease agreements also suits companies because they can always negotiate a better deal or frequently a better asset.

Companies who use leasing don’t have to tie up large amounts of capital into an asset which has an uncertain future value or spend time trying to source a buyer when it is no longer needed, all whilst paying all the maintenance costs and being hit with the asset’s depreciation.

Those risks and responsibilities can lie with the lease provider.


So, Why Do Companies Own Assets Just To Lease Them To Others?

For-profit, like any other venture.

The market for leasing assets is huge as the ability to access cutting-edge, top of the line equipment without the full ticket spend means more and more businesses are turning to lease agreements for their equipment.

This means that demand is high and lease providers exist to satisfy it, but they will only let their asset be leased as long as it covers their costs (overheads etc), the depreciation of the asset value to its residual value from when they purchased it and their profit margin.

 

Are There Any Drawbacks To Leasing?

Yes. There’s risk on both sides of a lease agreement.

The lease provider needs to preserve the future value of their asset so that they can find another customer or sell it to a would-be buyer. In order to encourage the preservation of the value of the asset then penalty clauses and charges will form part of any equipment lease agreement.

On the other side of this argument (argument being the operative word), the lessee needs to be sure to not incur these penalty charges. Without clarification and assurances, there can be disputes over what constitutes damage or wear and tear, resulting in the lessee having to pay repair costs before the final inspection by the provider.

Further complications arise when lease agreements get more intricate.

 

Which Industries Lease Equipment?

- Civilian Airline Industry

Everything from the jet which transports the passengers to the desk where they checked their luggage is most likely leased. The fluid nature of the industry and the high, high ticket price of some items (jets in particular) makes leasing the most sensible option. Especially as airline companies have been able to keep the accounting of the plane’s lease agreement off their balance sheet (although this is changing).

- Service Providers

Large service providers will likely be big users of lease agreements too. From delivery trucks to IT equipment, multinational companies spread over several locations preserve some ability to be flexible by using lease agreements.

- Construction

One of the industries which most suits leasing is construction. Plant and machinery used in construction is expensive to purchase but isn’t used consistently for long periods of time on any one project. A number of tower cranes can be seen across the London skyline at any one time, for example, but it’s likely they’re all be being hired on a short-term lease basis due to their high cost and the fact they might be needed for a day or two here and a week or so there.

At the other end of the scale, tools and equipment change relatively quickly, so power tools and specialist equipment is often leased because providers can offer upgrades to “the latest model” automatically.

- Farming and Agriculture

Similarly, to construction, farming and agriculture machinery is expensive. Also, the industry is not typically cash rich and is obviously very seasonal. This means that the leasing method of acquiring assets makes perfect sense – allowing payment dates to reflect the seasons.

 

- Manufacturing

Markets change, and margins are often tight, particularly further down the manufacturing chain you look. Leasing their large, complex machinery offers those who manufacture things some controllable flexibility.

- Commerce

From POS systems in a small independent business to large warehouses for an international wholesaler, commerce is another field which utilises the benefits of leasing. The turbulent nature of retail and the frequent need to open and close locations is suited to leasing.

  

Is Leasing Right For Your Business?

It very likely is. Unless you are particularly cash-rich and know that you will be able to absorb the risk of asset depreciation and future costs, it makes sense to utilise leasing. Especially in such a competitive market.

If you’d like to find out more about how leasing works, take a look at this free download, 'The Ultimate Guide To Leasing' which covers the basic principles of leases, the different types of leases and advice on how to maximise the value you receive from your lease portfolio.

 

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