Posts in category: Benefits of Leasing

Not All Equipment Leases are the Same

A lease may seem like a straightforward term, meaning you make payments on business equipment for a set amount of time and once the leasing term ends, the equipment may be returned to the lessor. In the simplest terms, a lease is a rental agreement in which you pay for the use of equipment for a set amount of time. The two most common leases are fair market value (FMV) leases and capital leases. However, like many financial aspects, there are decisions a business owner must make regarding the type of lease that best suits their financial position, type of business, and type of equipment.

Based on the conversations our team has every day with business owners, we can help shed some light on the benefits of both leases and help you determine which one is best for your situation and goals, both long and short term.  Today we will address a Fair Market Value Lease.

What is a Fair Market Value (FMV) Lease?

A FMV lease derives its name from the lessee’s option to purchase at fair market value the equipment at the end of the leasing agreement. The price is determined at the end of the lease. FMV leases also are referred to as operating and true leases – operating because the lease payments are recorded as an operating expense and true because they work like a basic rental agreement.

What are the Benefits of Fair Market Value Leases?

1. Monthly lease payments offer an opportunity to add equipment to your business that you might not be able to afford otherwise, which in turn could make your company more efficient and profitable.
2. FMV leases keep equipment off the books as an asset or a liability since it is never purchased and the lease payment is a deductible operating expense. Since it’s not an asset, the equipment doesn’t increase your company’s value. And because it’s not a liability, it doesn’t increase your debt. Depending on your future business plans, both of these situations could work in your favor.
3. Generally, FMV leases have lower monthly payments for shorter terms. They are often a viable way to get equipment needed for a short amount of time or for a specific project without taking on debt or the hassle of selling it once the project is over.
4. FMV leases give you the luxury of time to assess the equipment’s performance and usefulness to your operations. If it doesn’t help you meet your goals, you return it at the end of the lease. If it does, you can purchase it at fair market value once the lease expires.

For Which Types of Businesses are Fair Market Value Leases Ideal?

FMV leases can act as insulation against obsolescence. They are ideal for business owners in the technology sector or another industry in which technology quickly evolves. Rather than investing in equipment that will need to be replaced soon after new technology hits the market, a fair market lease for such equipment lets you return it at the end of the lease. Then, you can enter into a new FMV lease for the latest equipment. Since FMV leases tend to be shorter, your business will never be operating with outdated equipment, unless you decide it sufficiently serves your needs.

Talking with your accountant and Global Financial & Leasing Services can help point you in the right direction of a lease that fits your goals and financial situation.

More reasons to consider leasing

Leasing equipment protects your cash flow. Leasing equipment has a lower upfront cost, which is incredibly appealing if you have fewer available capital funds than operating funds. Also, leasing gives you time to pass the cost of your lease payment on to customers through your pricing structure.

It provides a cushion from the negative effects of obsolescence. Technology advances so rapidly that equipment you purchase today stands a good chance of being obsolete in a few years if you’re lucky – months if you’re not. Replacing outdated lower-cost technology like phones and computers is difficult enough to stomach. Updating equipment that you invested tens or hundreds of thousands of dollars in is like a kick in the stomach.

With a lease agreement, you’re paying monthly for equipment that meets your immediate needs. When the time comes to update your technology, often lease agreements include options for trading in leased equipment for new technology. This is so common that even cellular providers are now leasing smartphones for a monthly fee with an upgrade guarantee, meaning customers never buy and own their phones, but they can always trade up as soon as new models are released.

Trading in leased equipment is far easier than trying to sell that equipment. Others in your industry want the latest technology and are not willing to take on the cost of obsolete equipment. More often than not, outdated equipment ends up collecting dust and taking up valuable space in storage. Or worse, it is kept in use and negatively effects productivity and profit.

The leasing company takes care of the down payment upfront. Purchasing a piece of equipment can require a hefty down payment, similar to the down payment homebuyers are required to put down when buying a house. Leasing equipment eliminates that down payment because the leasing company pays the down payment and rolls it into the monthly lease payments.

Bottom line. Why drain your cash reserves to buy equipment when you could allocate that money toward growing your business and being more competitive in the marketplace? Leasing equipment allows you to retain cash and acquire the revenue-generating equipment your business needs.

Since 2009, we’ve helped decision makers in health/medical, construction, restaurant, machinery/manufacturing, printing, and logging/forestry industries lease or finance the purchases critical to their business. Let’s talk about how we can help your business succeed.

What smart business owners understand about leasing equipment vs. buying equipment

A smart business owner would never hire a dynamic, new sales associate and pay him or her three years’ salary in advance. No. Instead, a smart business owner ties compensation to the revenue the sales associate generates for the company. Even though many business owners consider their employees their company’s most important “asset,” they pay a salary for their productivity as it generates sales, and not a minute before.

Regardless of the industry you’re in, this same mindset should apply to how you add business equipment. Just like you’d never waste resources hiring a non-essential employee, it’s a waste of money to invest in equipment unless you can answer, “Yes,” to two questions:

1. Is it essential to providing your service or product?
2. Will it generate revenue?

Once you’ve determined that a piece of equipment will help grow your business, the next decision is how to pay for it. The two most obvious choices are to either buy it or lease it. In the majority of cases, smart business owners lease equipment. That way the payments are made over time and are funded by the revenue the equipment generates.

The formula for determining whether leasing a piece of equipment is a smart move is simple:

The revenue generated by the equipment is > or = to the lease payment.

If it is, then leasing makes sense for a number of reasons.

Contact us for more information on how you can make leasing work for your business.