How to Choose the Right Equipment Leasing Agreement and Compare 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 are keen on leasing instead of purchasing, it is crucial to pick the right leasing company.
When assessing an equipment leasing company and how it fits your goals, review their leasing arrangement offers.
The most basic offer can work as a loan replacement. The lessor finances your equipment, which is considered yours within the period of the lease. During this timeframe, you make periodic payments, and then you pay a minimal residual fee to close it out. This type of arrangement is referred to as 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 don’t want to own the equipment for a long time, you may ask the leasing company for an operating lease, which is akin to a rental with an option to buy. The lessor owns the asset but you can purchase it by the end of the lease term.
Overall Lease Cost
Besides the lease agreement, you also have to look into the cost that comes with your lease. When comparing various leasing companies, look into the following:
This will be your biggest cost when it comes to financing. Of course, lower is better, but you need to know how and how often this rate is applied.
This fee, which is usually applied up front, comes with loans more than leases. It is taken from the money you receive as 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 may be charged only once or at certain points during the lease term.
This is the portion of the equipment’s total cost that you must pay when taking out an equipment loan. However, there is usually no such requirement for leases, though you might have to pay the first and last installments upfront.
This is the amount of cash you are expected to pay with every billing cycle (typically monthly). If you pay more on a monthly basis, you will pay less for your residual fee, or the amount left over by the end of your lease and which you have to pay if you decide to buy the equipment.