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Today, I’m giving you an overview of equipment leasing, starting with the benefits, followed by the potentially substantial downsides.
To lease or not to lease. That IS the question! Generally speaking, I advise my client to never lease to have to, or unless they a compelling reason. And if they have to lease, make sure the lease is thoroughly reviewed by a competent professional. This will at least allow them to understand what they are getting into.
Why would a business have to lease? The reason would be because they have no other options. This may be because they don’t have the cash to make a down payment on a standard loan, or they aren’t in a financial position to qualify for a loan.
That being said, there may be some compelling reasons to lease. I have a client who finances a fleet of trucks through leases, and his primary motivation is to keep activity off of his personal credit report. This qualifies as a good reason for leasing. Another good reason is that sometimes, large, reputable vendors will provide excellent leasing programs in order to sell their products. But even these programs may have some hidden traps, which is discussed in other videos.
Now for the downsides: 1) It can be difficult to determine the actual interest rate. (See our video library for a demonstration of how to determine the actual interest rate). 2) Equipment leases are difficult and costly to get out of. Unlike a loan, where you can get out simply by selling the equipment, with leases you are potentially stuck for the entire term. 3) Many leases have a built-in trap that can potentially cost you a lot money. That trap is referred to in the industry as the “Evergreen Clause.”
There are many other considerations in leasing equipment, which include whether or not the lease liability needs to be disclosed on your balance sheet. To learn more about leasing, check out our video library at www.cfooutsource