Learning How to Lease

A lease is a contractual arrangement in which a leasing company (lessor) gives a customer (lessee) the right to use its equipment for a specified length of time (lease term) and specified payment (usually monthly). Depending on the lease structure,Guest Posting at the end of the lease term the customer can purchase, return, or continue to lease the equipment. Leasing works for any type of business. Every imaginable type of organization leases throughout the world including proprietorships, partnerships, corporations, and government agencies, religious and non-profit organizations. Over 80% of American businesses lease at least one of their equipment acquisitions and nearly 90% say they would choose to lease again.

Almost limitless possibilities

Your Company can lease anything associated with the operations of your business including all types of capital equipment, hardware, software, and soft costs such as installation and consultation. Leases for large equipment such as container ships and passenger or cargo aircraft can also be arranged by professional companies such as Loanmarketeer or Ecapitalservices. Other than leasing military equipment to small countries with tin – pot dictators who happen to have delusions of grandeur, leasing is possible in all business equipment situations.

Leasing preserves vital credit and capital.

Leasing your equipment versus purchasing through a conventional bank loan makes better use of your money. Most business owners have wrongly been conditioned to believe that through purchasing equipment out right they are saving interest and finance charges.

Is a bank loan cheaper than leasing?

Banks charge lower interest rates than leasing companies, don’t they? Well, not exactly. That’s because rate per se, the cost per thousand dollars of equipment per month or the “interest rate” that is being factored into the transaction, is an unimportant consideration. Far more important are the terms and conditions of the transaction.The terms of your “low rate” bank loan usually require that you keep some money, perhaps 20% to 30% of the loan amount in a non-interest bearing account at that bank as “compensating balances” (so the bank is really lending you 70 cents of their money and 30 cents of your own money for each loan dollar). When you compute the real yield on that, you find that a five year 8% loan with a 30% compensating balance requirement is really about a 24% loan (because you’re paying interest on 100%, but only getting 70%). Using the same formula, a 20% compensating balance requirement makes their yield on that 8% loan almost 18% and with a mere 10% compensating balance, it’s still about 12.5%.

So you have this “low” bank rate, but you have to leave part of the money in the bank. You also have covenants that require you to maintain certain financial ratios, the bank have filed a blanket lien against your assets and you are cross collateralized with your personal accounts, your kids’ trust accounts and everything else. There is probably a clause in the loan agreement that says that if at any time the bank feels uncomfortable with your industry they can call the loan even if you have made every payment on time, and another that says they can increase their rate if their cost of money goes up. Oh, and they probably didn’t want to finance the entire cost, preferring that you made a down payment. In short, there are terms and conditions that you probably didn’t know about and a rate effectively higher than you imagined. So it is pretty clear that the “rate” is not the only factor in making a decision on how to finance equipment. You have to look a lot deeper.

Another factor militating against bank financing and conventional ownership is that new technology is obsolescing everything that was “new technology” before, and that is something that is going to continue to happen in the future… only faster. So, given that most equipment is going to be worth very little very soon, conventional financing becomes even less desirable.

It is the use of equipment which generates profit, not the ownership.

Cost Analyses

Here is a quick and easy way to estimate what a piece of equipment can actually cost using leasing and after tax costs. Since qualifying leases can be expensed directly, the tax benefits are available sooner.Here is an example:1. Determine the equipment cost $89,900.002. Monthly Lease Payment (60 month lease*) $1977.003. Tax deduction (We’ll use 40% of gross**) $790.804. Deduct line 3 from line 2 to get the net cost per month $1186.20Now let’s translate this into operating figures:5. Divide by 22 business days*** to get the net cost per day $53.92Divide by 8 hours**** to get the net cost per hour $6.74Thus a $90,000 piece of equipment can really cost less than $7 an hour

NOW TRY THIS WITH YOUR SITUATION:1. Equipment Cost $______2. Monthly Payment (line 1 x .0235) $______3. Tax Deduction ( ___ % of line 2) $______4. Net Monthly Cost (line 2 less line 3) $______5. Net Daily Cost (line 4 ÷ by ___ days) $______6. Net Hourly Cost (line 5 ÷ by ___ hrs) $______*Illustration only. Actual rate may vary.** Federal plus state usually around 40%.*** Avg. # of business days/month at five days per week.**** Select hours of operation per day.

Leasing is flexible

Types of Leases

While leasing companies may use the same name to describe a lease, the terms and conditions written in their contracts often vary. Be certain to review your documents carefully and ask your account executive to explain anything that is unclear.

True Lease or Operating Lease.

Works best with equipment that rapidly depreciates or becomes obsolete in a short period of time. In a true or operating lease, the leasing company retains ownership of the equipment during the lease. True or operating leases typically have no predetermined buyouts; customers usually classify these payments as an operating expense. This type offers the lowest payments and typically is the most tax-friendly form of leasing. True or operating leases offer three choices at the end of your lease:

return the equipment to the leasing company,
purchase the equipment at its fair market value or option amount, or
extend your lease term
Finance or Capital Lease.

If you plan on owning the equipment at the end of the lease such as heavy construction equipment, ships or aircraft, the full purchase price plus interest charges are spread over the length of the lease. You will own the equipment at the end of the lease for a minimal amount, such as a fixed percentage of the original cost or $1.00.

Skip Lease.

Organizations that need a flexible repayment schedule such as seasonal businesses, agricultural companies, recreational services firms, and school systems. You specify months when no payments are made. You have the flexibility to adjust to irregular cash flow.

Municipal Lease

Local and state government organizations looking to acquire equipment, the tax structures and details of municipal leases vary considerably from standard business leases. Seek the advice of your financial advisor to better understand your municipal lease optio

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