Equipment lease financing: Is it really the best of both worlds?

Luke Wiercinkski

Friday, 05 June 2020

Whether you own a construction company or retail space, equipment lease financing is a great way to get your hands on business-critical assets without having to worry about depreciation, or what the value of your asset will be at the end of the finance term.

It's also worth noting that physical assets—from vehicles and office supplies to the latest tech—might not hold up the way you’d like them to over time, but upgrading can be an expensive and time consuming process.

If your assets are for temporary use or depreciate quickly, equipment leasing could be an attractive option.

What is equipment lease financing? How does it work?

An equipment lease is a contractual agreement between you and your lender, letting you borrow and use a piece of equipment in exchange for periodic repayments. When leasing assets, they don’t appear on your balance sheet either, meaning your debt-to-equity ratio will remain lower than if they were financed in another form (i.e. chattel mortgage).

These repayments are based on the value of your equipment and associated interest rate. For example, a truck driver who needs a large vehicle for transporting goods will likely make higher repayments than a real estate agent leasing a small business car.

In a lease agreement, you’re known as the lessee and your lender is known as the lessor. Though your lender technically owns the equipment, you’re able to use it for business purposes. This makes replacing or upgrading assets a much simpler process, as you don’t have to keep them on your hands for long.

But, it’s worth noting there could be restrictions on how you use your equipment depending on the terms outlined in your contract. Your lender or product specialist will be able to outline these for you, if there are any.

Depending on the lease agreement and associated terms outlined in your contract, you’ll have one of three options at the end of the leasing period:

  • The ability to purchase your equipment at a fair market value
  • Refinance the leasing terms, or
  • Return the equipment back to your lender and start again

Is an equipment lease right for me?

An equipment lease is a solid option for businesses who need equipment for a short period of time, or are expecting their equipment to depreciate quickly. As mentioned, you won’t have to hang on to your equipment for long, and therefore can easily replace or upgrade it without being charged to do so.

Leasing (as opposed to buying) can also be a smart move for businesses who don’t want to dip into savings or disrupt cash flow. This is a fair preference, and leasing gives you the advantage of having your assets sooner rather than later at a lower upfront cost.

If your new equipment will make day-to-day operations run smoother or dramatically increase output (leading to more sales), you’ll likely make your money back pretty quickly, even when accounting for additional interest charges. Need help doing the math? Our lending experts are here not only to lend a hand with finance, but with your growth goals as well.

Common assets financed under an equipment lease

Any types of equipment—from tractors to office supplies—can be financed under an equipment lease. But some are more common than others. We often have leasing requests for things like:

  • Security equipment
  • Construction equipment like tractors and excavators
  • Cars, trucks and other vehicles

Other assets you can lease:

  • Computers, laptops and tech
  • New office fit-outs
  • Furniture
  • Tools and materials for production
  • Machinery

Equipment leasing companies

Equipment leases are offered by both banks and non-bank lenders. Each company will offer different products, rates and terms. There is often a big discrepancy between the cheapest and most expensive leasing arrangement at any given time. That’s why it pays to shop around before signing on the dotted line.

If you don't have time to shop around and compare hundreds of rates, call us on 1300 780 568 or use our free loan finder to explore your equipment lease options. Your quotes are based on products from 80+ leading lenders, so rest assured you’re going to get a great rate tailored to your specific business goals.

What to look for in a leasing company

There is no one-size-fits-all finance solution, so this depends on your needs and preferences. But, to ensure you’re getting good value, it’s wise to consider things like:

Rates

Just like buying a new car or house, you should shop around and get a feel for the market before making a final decision. Rates vary, and picking the first option you see won’t land you the best deal. As mentioned, Valiant ensures you’re getting a great offer by comparing like-for-like products from 80+ lenders.

Terms and conditions

You’ll not only want a respectable interest rate, but terms and conditions you’re comfortable with. Some equipment leases come with more flexibility than others, and you might save yourself a lot of time, money or hassle down the line by doing a little extra research to make sure the lease you choose is the best one for you.

For example, some equipment leases will have restrictions on how you use your equipment under the agreement. It would be far from ideal to find out you can’t use your equipment as intended.

Fees, features and options

As much as we would like for everything to be laid out for us in clear and transparent language, finance is a complicated product, and it’s easy for an important detail to get lost in the fine print. For example, if you plan on purchasing your equipment at the end of your lease, it’s important to read through your contact and make sure this is actually an option. Not all leases are created equal.

Tax benefits

Some lease agreements allow for tax-deductible repayments. They may be partly or completely tax deductible, assuming your equipment is being used to generate accessible income for your business. Speak to your accountant for more information on whether your repayments are tax deductible.

Reputation

There are plenty of fish in the sea, so it’s wise to read up on customer reviews and outcomes before committing to your lease. You’ll be working with this company for (at least) the foreseeable future, and potentially years, so make sure they’re reputable, helpful and easy to deal with.

What’s the difference between asset finance and leasing?

Equipment leasing is just one type of asset finance. Asset finance can be used to fund vehicles, machinery, office materials and other tools for business use, with different ownership options.

For example, some types of equipment finance allow you to own your equipment from the get-go, while others transfer ownership to your business at the end of your repayment period.

Alternatives to equipment lease financing

You might be wondering whether there are alternatives to leasing equipment. There are a few other options. You can:

  • Choose another type of equipment financing, such as a chattel mortgage or hire purchase agreement
  • Buy the equipment outright. But should you?

To lease, or to buy?

Leasing equipment gives you the ability to use assets without committing to ownership. Buying equipment outright can be expensive, and create short-term cash flow issues. When leasing, you don’t need to dig into precious savings or disrupt day-to-day operations.

On the other hand, owning your equipment from the get-go gives you the most control over how you use your equipment, and you’ll likely save money longer-term as you won’t be paying any interest. There are also depreciation benefits you can claim through the Instant Asset Write Off Scheme, which may help to reduce your tax payable when EOFY comes around.

If your lease agreement allows you to use your equipment as you wish, and your preference is to upgrade or get rid of it in the foreseeable future, an equipment lease is your best bet.

To recap, advantages of leasing include:

  • Greater flexibility: options to upgrade, return equipment or purchase at the end of your equipment lease, depending on your agreement
  • No need to commit to ownership - ideal for those who like to upgrade their equipment often, without the burden of ownership at the end of the term
  • In some cases, leasing can be cheaper upfront, giving you the ability to invest in a higher quality asset
  • Avoid dipping into savings or disrupting cash flow
  • Take advantage of potential tax benefits for your business. Speak to your accountant to find out whether these apply to your situation
  • When leasing, assets do not appear on your balance sheet, which puts your business in a more favourable light by lowering your debt-to-equity ratio

If you’d like more information on your equipment financing options, chat to our lending experts for free. They're here to answer your questions and point you in the right direction.

We can arrange finance for you in as little as 24 hours and better yet—we take on all the heavy lifting, from your initial enquiry through to settlement.


Luke is Product Specialist here at Valiant, specialising in Asset Finance. He helps empower business owners by giving them the tools and advice they need to build awesome companies from the ground up.

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