Equipment Leasing is an arrangement whereby you rent equipment for the operation of your business rather than purchase it outright. This form of arrangement has several benefits and may be suitable for your business for various reasons. However, it would help to consider whether it is financially appropriate for your business to do so. This article will explain the types of equipment leasing and the benefits and drawbacks of doing so.

Benefits of Business Leasing Equipment 

If you decide to lease equipment for your business, you might encounter many benefits. For instance, payments for leasing equipment are often fixed payments. As such, this predictability could allow for better budgeting and avoid rate fluctuations over the lease term. Some other advantages include:

  • cash flow;
  • tax benefits; and
  • upkeep with technology. 

However, you should note that the applicability and nature of each benefit will depend upon your particular business needs and the issues you face. 

Cashflow 

The purchase of equipment can require a significant amount of upfront capital to operate your business. However, you can use equipment leasing to spread these costs over time. Therefore, providing you with greater cash flow during the start-up of your business. 

Tax Benefits 

If you use the equipment to generate accessible income for the business, it is likely the lease payments may be partly tax-deductible. In some cases, you may find these payments are fully tax-deductible depending on the circumstances. 

Technology 

With the continuous development of technology, keeping up with the latest equipment can be costly. Furthermore, it can be a financial burden for your business to stay updated. One way to manage this is through equipment leasing, where you can satisfy your company’s needs for current technological equipment. 

The Issues with Equipment Leasing

If you decide to proceed with equipment leasing in your business, there are some key issues you need first to consider. For example, you will first need to determine the type of equipment you wish to rent and if your business can afford to do so. Additionally, you will need to consider:

  • the term of rent;
  • the lease amount;
  • whether you need to obtain insurance. 

Once you determine whether you will need insurance for the equipment you rent, you need to decide what coverage you require. To do this, it will help to consider;

  • what will happen in the case of an accident;
  • who will be responsible for the maintenance and/or repair of the equipment; and 
  • who may receive manufacturer’s warranties. 

Types of Equipment Leasing 

The type of equipment leasing that you will follow will depend largely upon who your business contracts with for the equipment. Additionally, the type of financial institution you are dealing with may have some impact. The two main types of equipment leasing include a(n):

  • Operating Lease; and 
  • Hire Purchase. 

Operating Lease 

An operating lease (or rental finance or off-balance borrowing) is the most common finance method for business equipment. Under this arrangement, you do not need to pay any upfront amount for the equipment and can use the equipment on a fixed periodic payment. Such agreements can last from one to five years and must comply with the Australian Taxation Office guidelines. Moreover, this type of lease does not require further deposits. However, you will need to finance the full purchase price. 

Hire Purchase 

A hire purchase arrangement will be between the vendor/owner and the hirer. The amount payable for the equipment will apply for a fixed term. Additionally, the hirer will have ownership of the equipment from its commencement. Like an operating lease, the term of a hire purchase agreement can last from one to five years. However, with hire purchases, the amount payable is inclusive of GST. Although, the monthly repayments are not subject to GST.

Key Takeaways

Equipment leasing can be beneficial for your business. However, it can also be a complicated process to navigate. The cash flow, tax benefits and ability to keep up to date with technology can be particularly advantageous to your business. Although, renting equipment can be a costly exercise. You will need to consider whether doing so is suitable for your business.  

Whether you are leasing equipment to businesses or you would like to lease equipment for the operation of your own business, our specialist leasing laws can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions 

What kind of equipment can I rent?

There are various types of equipment that you can lease or rent for your business. Although, computer and office equipment, PABX and telephone equipment, security equipment, office fit-out equipment, industrial and medical equipment are the most common types to rent. 

What is the fair market value? 

The fair market value is the price at which the equipment would change hands between a willing and informed buyer and seller. 

What is the difference between an operating lease and a finance lease? 

An operating lease allows you to only pay for the use of the equipment. On the other hand, a finance lease allows you to pay a set residual amount at the end of your lease term to own the equipment outright. In a finance lease, the finance company owns equipment until the buyer makes the residual payment. 

What is a novated lease?

A novated lease is a form of salary packaging whereby your employer provides you with a benefit/compensation other than a cash salary or wages. 

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