Choosing an Equipment Leasing Agreement and Comparing Costs
As a business owner or manager, one of the things you probably need to do is to procure or upgrade certain equipment. And if you’d rather take out a lease instead of making a purchase, it is crucial that you pick the right leasing company.
When assessing the suitability of an equipment leasing company, see what leasing arrangements they can offer.
The simplest offer will probably function as a loan replacement. The lessor finances your equipment, which is considered yours within the period of the lease. You then make scheduled payments throughout this timeframe, and as you close out the deal, you pay a small amount as residual fee as well. This arrangement is called a capital lease.
But why would you go for a capital lease rather than a loan? Although the interest rate for a capital lease is usually more than that for a comparable loan, a capital lease is good for the entire cost of the equipment you’re purchasing, and in most cases, necessary transportation and installation costs too.
On the other hand, if you’re thinking of a shorter term deal, inquire from the leasing company regarding an operating lease, which is similar to a rental with an option to buy. The lessor has ownership of the asset, but this can be transferred to you by the end of the lease.
Total Lease Cost
Aside from the type of lease agreement, cost is another crucial consideration you need to make. When you compare different leasing firms, focus on the following:
When you talk about financing, interest rate makes up the bulk of the cost. Definitely, the lower, the better, but you have to know more details, such as how often and the manner this will be applied.
Typically applied upfront, this fee is rare with leases, although it’s rather common with loans. It is removed from the money you get as you receive your capital.
Your financier can justify this in several ways, but this is no more than a fee you pay for servicing your account. It can be a one-time fee, or it can be charged at specific intervals.
This is a percentage of the total amount of the equipment, which you are expected to pay upfront when you apply for an equipment loan. Leases, however, do not require a downpayment in most cases, but you might be expected to pay the first and last installments upfront.
This is how much you need to pay per billing cycle, which is usually monthly. With lease payments, higher monthly payments will mean a lower residual fee (the leftover amount as your lease term ends and which you need to pay if you intend to purchase the equipment).
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