To piggyback my previous post, does anyone lease or rent to buy ovens? How has it worked? How long is the lease? Thanks!
Leasing equipment can be a way to extend your credit resources if you need to do that. Typical lease calculations, though, often amount to 12% and higher effective interest rates. If you have other borrowing options, (besides credit cards) they will nearly always be cheaper.
A typical equipment lease will be for 3-5 years and structured to have a $1 buy out at the end of the lease.
So, for example, if you obtained a set of equipment with a value of $15,000 and leased them for 5 years at 12.5% with a $1 buy out at the end, you could expect the payment to be about $335 per month. A really good lease might be $310 per month.
Not a great way to go if you have choices, but better than some others. Be sure you shop around for the leases, they are not all created equal. Your equipment supplier should be able to refer you. You bank should be able to as well.
I leased my ovens (as well as some other equipment) when I first opened. I had an implied interest rate of about 10.0%, which was high. However, banks wouldn’t touch me and I didn’t want to sell some investments because of tax implications. The opportunity cost there led me to pay the higher rate on the lease. It ended up working well because the investments I didn’t sell had some good gains over the period I was leasing. But it could’ve just as easily gone the other way. If able, traditional financing is the way to go.
My lease was a 10% buy-out. You put up 10% of the value at the beginning as a security deposit and then make your monthly payments (36 in my case). At the end, they kept the 10% and you own the equipment. If you do any type of lease other than the “$1.00 buyout” make sure you have somebody take a look at it and figure out your implied interest rate. The $1.00 buyout is a straight forward calculation, but other lease terms can drastically change the rate if you don’t know how to calculate it.
Remember you should include the tax implications of leasing versus buying. In most cases leasing has tax advantages that will act to lower your implied rate, but not always. A CPA would be one to talk to about that.
One pro of leasing is that it will be significantly easier to get funding. I have good credit, and I was approved for my entire lease (plus $10,000 more if I wanted to use it) three days after sending my paperwork to them.
Also make sure you take into account the insurance cost. The leasing company will need to be named as additional insured. The leasing company will probably be able to provide you with insurance and bill it directly to you, but watch out for that. The cost they quoted me for insuring was astronomical given the value of the equipment.
As long as you are profitable, I don’t think there is any tax advantage to leasing. The lease payments are deductable as a business expense and spread out over the length of the lease. If you buy equipment, the purchase is deductable in full the year you make the purchase (up to 100K and only offsetting profit; the purchase can not create a loss). If you are unable to deduct the purchase you can still depreciate it which comes out the same in the long run and is comparable to the lease arrangment. If you finance the purchase, the same rules apply and the interest is deductable… so there are tax differences, but they are not big and they all wash out in the end.