Equipment leasing makes a lot of sense for small- and medium-sized businesses (SMEs) who often have to ensure they’re not wasting any resources unnecessarily to keep their cash flow healthy.
Purchasing equipment outright can put a strain on an SME because it means having to use up money in the bank – depending on the piece of equipment you’re buying, that could mean thousands of pounds of expenditure.
Equipment leasing allows you to keep money in the bank ‘for a rainy day’ (or for other business-growth costs), with leasing agreements typically requiring a much smaller initial payment as some sort of deposit.
If you like the sound of that, this guide to equipment leasing for SMEs will show you how to get started and why it could give you an edge over the competition in your market…
How many SMEs lease equipment?
In research Shire Leasing conducted last year, it was revealed that only 16% of SMEs have opted to take out finance to fund new equipment.
Commenting on why so many SMEs are seemingly unwilling to lease their equipment, Mark Picken, Shire Leasing’s Chief Executive Officer, said: “SMEs often overlook the alternative finance options that are available. Through leasing, businesses can affordably pay for equipment as they use it, and in some cases, the single direct debit payment can also include the maintenance and service offered by the supplier,” he said.
There could also be an element of risk-aversion that’s stopping SMEs from making the most of the financing options available to them, preferring to stay within their means, at least until the economy has a more certain look about it.
But equipment leasing doesn’t carry the same risk as other financing options, and enables your business to stay competitive and efficient by having access to the latest technology.
Types of equipment leasing agreement
There are a number of different leasing options that you can choose from – here are the three most popular:
1. Finance lease
With a finance lease agreement, the finance company (like Shire Leasing) buy the equipment you need and lease it to you over a set period of time.
While the equipment will be in the finance company’s name, you can choose and use it as if it were your own asset.
What attracts SMEs to finance lease is the flexibility of the agreement, with rental payments able to be tailored to match your business’s cash flow. Plus, finance lease rentals can be 100% tax deductible against profits.
2. Hire purchase
The difference with a hire purchase agreement is that you have the option to purchase the asset at the end of the lease (for the depreciated value). This means that if you’ve become dependent on the equipment, you don’t need to think about the prospect of handing it back.
There’s also a possibility of becoming the owner of the asset earlier than agreed by making a lump-sum payment to settle the remainder of the finance.
3. Sale and leaseback
If you’ve already bought a piece of equipment but later realise that it’s consumed too much of your capital, you can sell it to a finance company – often for the full invoice value paid – and then have it leased back to you over an agreed period of time.
The cash paid to you for the purchase goes directly into your business account, providing you with some valuable working capital. It also protects you from any losses should the asset depreciate in value.