Equipment financing is more or less a necessity at most organizations in the U.S., from up-and-coming small businesses to well-established enterprises. Business owners often turn to equipment leasing, and the financing that comes with it, because it’s much more cost-effective than buying the same asset outright or taking out an interest-bearing business equipment loan to do so.
Just how extensive is lease financing throughout the economy?
According to the Equipment Leasing and Financing Association (ELFA), 80% of companies rely on some form of financing when acquiring equipment. Said financing includes not only leases, but also loans and lines of credit. These financial instruments are provided by equipment financing companies, a broad category of lessor firms that includes traditional banks as well as manufacturers, vendors, and various independent lenders.
Although ELFA maintains statistics for multiple types of financing, we are only going to focus on financing via lease in this piece. So, let’s start by exploring why leasing is frequently the ideal form of business financing, and what advantages it has over a loan or line of credit.
Why to lease: Understanding key benefits for all businesses
Taking out a lease is a common route toward acquiring certain types of business assets like IT infrastructure (e.g., computers, servers, etc.), healthcare assets, and capital equipment. But why not simply buy them outright or set up a loan? The big reasons for choosing a lease instead include:
Few or no upfront costs
Purchasing an item means you incur its full cost right away. Similarly, a loan typically requires a down payment of some kind, which can be a substantial dollar amount even if the interest isn’t all that high. Over the life of the loan, you’ll end up paying more than what the asset is worth.
For some assets, like computers, these high costs can be particularly onerous because the equipment itself quickly becomes obsolete – so you’ve paid a lot for something that isn’t even the most current solution available.
In contrast, a lease usually requires no upfront costs. The price of the asset is spread evenly across predictable monthly payments. Depending on the lessor, the leased asset might also be returned and exchanged for something more recent at the end of the lease term or earlier, which can be useful for staying up to date without breaking the bank.
More manageable equipment life cycles
While we’re talking about upgrades, we should mention that continually swapping old assets for new ones can become incredibly expensive if you’re relying on purchases or loans. Something like a set of computer monitors or PCs might have to be updated every few years in response to technological advances across the industry.
Paying full price or considerable interest for these assets is often unmanageable, especially in light of constrained IT budgets. According to the 2020 Spiceworks State of IT report, more than half of businesses expected their IT spend to remain flat or decrease year-over-year.
With leases in place, you can upgrade more efficiently. New assets can be secured for no upfront costs, paid for on a monthly basis, and returned to the lessor at the end of the agreement for safe disposal and data wiping.
Better support for day-to-day operations
Does your business rely on a piece of equipment that’s nevertheless quite expensive and would be almost impractical to buy outright? Let’s say you need a VoIP phone system or unified communications (UC) system to keep all your employees in touch.
As remote work becomes more common, such infrastructure has become much more important to SMBs. They rely on the scalability of VoIP and UC and their cost-effectiveness relative to traditional phone lines to stay competitive – but paying for them upfront can negate some of these advantages.
By leasing these collaboration tools, an organization can harness their power while also saving money. That’s a recipe for more sustainable operations.
Requirements in some industries
Leasing is the default financing setup for certain types of products and in specific industries. For example, in healthcare reagent rental agreements are everywhere. A blood analyzer might be furnished “for free” as long as the lessee agrees to purchase a minimum number of test strips every month.
This type of arrangement includes an embedded lease. Basically, leases are the only real option for financing these sorts of deals in healthcare. But although they’re common and help lessees avoid upfront costs, there are some issues to look out for.
More broadly, not all leases are equally advantageous or easy to manage; it really depends on the equipment financing company you work with. Let’s turn to some possible pitfalls to stay clear of, and how LaSalle, as your equipment financing provider, can help you remain on the right path when leasing.
Navigating potential lease complications
Applications fees and evergreen clauses
On a basic level, a lease can be saddled with a lot of costly add-ons, such as application fees and dreaded evergreen clauses, the latter automatically renewing the agreement unless you opt out. This is where it’s important to select an equipment financing company that is as transparent as possible. LaSalle never charges application fees or incorporates evergreen clauses.
Disposal and data wiping
If you lease a lot of IT equipment or assets that are used in a regulated industry like healthcare, getting rid of old leased assets can be potentially tricky. Some types of electronics cannot be simply discarded (due to e-waste restrictions and laws), plus they might contain information that needs to be thoroughly scrubbed from their storage media. LaSalle will take care of all equipment disposal and data wiping so that you can have peace of mind when the lease ends.
This is a big one. The Financial Accounting Standards Board updated its ASC 842 regulation in the late 2010s and the changes have been phasing in since then. The updated rules require agreements that previously were not recognized to be entered as Right of Use Assets, or ROUAs. Around the time of its enactment, ASC 842 was expected to bring nearly $1 trillion of new leases into official recognition; you can read more about what it entails in this document.
Overall, keeping track of all the operating leases that need to be recognized under ASC 842 will, at many organizations, require a new approach. Relying on spreadsheets is too inefficient, making it important to find an equipment leasing company that can help with lease schedule oversight and other management. Toward those ends, LaSalle provides a dedicated, cloud-based solution called LAMP.
LAMP provides a single place from which to keep tabs on assets and leases. It can send notifications about maturation dates and potentially problematic clauses or terms in leases. Through its mobile app, LAMP can also be used to scan assets on site and look up any up-to-date information on them. Having this level of visibility is essential for accurate accounting, so that lease-based equipment financing doesn’t open up new liabilities.
Why LaSalle Solutions is a trusted equipment financing company
LaSalle has been helping customers with leases for almost 40 years. For every one of our clients, we listen carefully to their needs and formulate a custom plan of action, recommending specific solutions that meet their requirements. We simplify the equipment management lifecycle through LAMP, while also providing transparent terms. Many of our leases have zero or even negative interest rates, thanks to upfront equity investments based on realistic assessment of the leased asset’s resale value.
To learn more about how we can help, take a look at this data sheet, or contact a member of our team today. We look forward to hearing from you!
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