When it’s time to replace or upgrade your equipment, you’ll find many companies eager to finance your assets through equipment leases. These companies can provide a valuable service, especially for businesses needing to spread out their costs over time. However, this article isn't about the benefits of leasing. Leasing can be risky, and there are numerous reasons to steer clear of equipment leases. Here are 10 of them:
1.Leases Are More Expensive
Let's address the obvious: it’s cheaper to pay upfront for equipment than to finance it over several years with interest. If you can afford to buy the equipment outright, it's worth considering.
2. Leases Are Complex
Simplicity has its merits. The more complex your financial arrangements, the more potential for problems. While nothing guarantees issues will arise, having extra payments to manage and ensuring the lease terms match your agreement can lead to unforeseen complications.
3. Changing Laws for Operating Leases
Leases are categorized into capital and operating leases. Capital leases facilitate ownership, whereas operating leases resemble rental agreements with a purchase option. Operating leases typically offer lower monthly payments and the ability to write off payments as rental expenses. However, starting in December 2018, the Financial Accounting Standards Board will require companies to recognize assets and liabilities for operating leases longer than 12 months. Consult a CPA to understand these changes if you're considering an operating lease for tax purposes.
4. Responsibility for Equipment Before Lease Ends
Previously, fixing reasonable wear and tear was often the lessor’s responsibility, but now, lessees usually take on these responsibilities. Capital leases, which often replace loans, are more likely to operate this way.
5. A Loan Might Be Better
Equipment leasing is popular for good reasons, but if you have time, credit, and enough for a down payment (typically around 20%), you might get better rates with a loan. However, loans might not cover "soft costs" related to the purchase, which leases sometimes do.
6. Renter’s Mindset
We live in a subscription economy where even essentials can be bought as subscriptions. While convenient for businesses, these recurring costs can add up. Evaluate your recurring expenses and consider if adding more is wise.
7. Financial Implications
If you don't already have an accountant, leasing might require you to hire one. Understanding tax deductions and accurately calculating your return on investment might demand more financial expertise than you’re comfortable with.
8. Challenges in Early Sale
Unlike buying with a loan, where you can sell the product if needed, leases are binding contracts that can restrict your ability to dispose of assets. Ensure you understand your ownership rights and any escape clauses in your lease.
9. Late Fees
Even if you’re punctual with payments, unforeseen circumstances can occur. Many lessors charge significant late fees. If you're not confident in making timely payments, reconsider leasing.
10. Peace of Mind
While paying upfront might be initially painful, it can offer long-term peace of mind by avoiding the complexities and potential issues associated with leasing.
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