10 Key Leasing Terms You Need To KnowOctober 22, 2019
5 Step Guide To Determining What Equipment You Need And Getting ItDecember 17, 2019
A lease is more or less an extended rental agreement where the owner allows the user to use a piece (or more) of equipment at the cost of the user paying periodic payments. While you’d think this sort of behaviour would be short lived, this isn’t the case. It’s been thriving with every passing year. It’s been especially popular with small business who have smaller capital and fewer options.
But because an industry is booming doesn’t mean any business should be jumping into this industry unaware. There are definitely some things to consider. Not to mention being armed with knowledge will ensure that you’re walking into a lease agreement with proper knowledge and not getting cut out of a good deal.
Below are some factors to consider before jumping into a lease.
Know The Categories
There are two primary types of leases: operating and long-term leases. Long-term leases can also be called capital leases. Each of these types have specific characteristics outside of their duration to keep note of.
Operating leases are short-term leases with cancelable terms for both parties. On top of that, the lessor (user) takes on the risk of obsolescence at the cost of enjoying tax benefits in the form of writing off the depreciation and any accelerated depreciation.
Broadly speaking, these leases are ideal for companies who need it for a short period of time. Think for a quarter or two.
On capital leases, the terms are locked in and you are leasing the equipment for a longer term. These leases are also called full payout or financial leases because these leases typically are a source of financing for assets the lessee wants to get.
Regardless of what it’s called, the lessee will likely be responsible for maintaining and insuring the asset. They’re also responsible for paying any and all property taxes on it.
But while there are these two types of leasing models, you’ll find that the vast majority of lease arrangements will take characteristics from both types. They are hybrid leases which combine various tax or financial benefits and are tailored towards individual’s needs.
For example, you may find a capital lease where the lessor is responsible for insurance and maintenance rather than that falling to the lessor. In fact you’ll find this sort of behaviour when leasing office equipment or vehicles.
Some leases may even help finance your lease by issuing debt and equity claims against the asset and future lease payments. These are called leveraged leases.
Know The Size Of The Ticket
Another term you may hear is ticket. Leases – regardless of what type they are – can be classified as “small ticket,” “medium,” and “large ticket” leases. These terms are used interchangeably and hinge on the value of the asset being leased.
- Small ticket covers assets valued $100,000 or less.
- Large ticket is for assets costing over $2 million.
- Medium covers anything between those two values.
Naturally the larger value the assets you get the more that the lease agreements will seem like major loan applications. And with that comes a whole other set of things to consider.
One of those major considerations is lease rates. Talk to your lease agent about adjustment to these rates depending on certain characteristics of your business. If you have a strong credit score, lease companies are going to offer you better rates. Other factors that can impact lease rates are the equipment you are leasing, how long you’re using the equipment and who is getting the tax credits from this deal.
Each lease company has their own way of arranging these things – talk to your agents and you’ll find a something that you can get along with.
The Other Elements
The lease rates aren’t the only factors worth pondering over. If you’re a small or medium-sized business, there are other elements to consider. Regardless, it’s key to be in the mindset that each item you’re looking to get should lead you to your own ultimate goals.
- Lease duration. If your equipment is going to need routine replacement, going for a shorter lease period is smarter. Even if it’s at the cost of paying a little more. If the equipment is standard grade, you want to go for the longest duration you can.
- Payments. Can your business handle the asking price of the lease? Make a note of your current cash flow.
- Financial terms. What happens when you miss a payment? What date do you need to send the payment?
- Residual values and purchase options. Is the lease another way of purchasing the equipment? If so, it’ll change the overall nature of the lease.
- The market value. The business will need to assess insurance costs and factor those into the lease. As such you want to make sure the market value is accurate. Especially if you’re considering capital leases.
- Who has tax responsibility? Each lease has their own tax obligations and who they fall to. Be aware of who covers what.
- Will terms be updated or cancelled? Various industries go through upgrades and changes. Being aware of whether your lease will stay the same or change matters. Especially if you’re dealing with technology where changes are faster.
- Can you renew the lease? What are the circumstances revolving around renewing?
- Are there any penalties for early cancellations? Are they reasonable?
- Consider other miscellaneous options like warranties and security deposits.