- Equipment leasing can free up a business’ cash flow and provide an easy path to expanding and upgrading equipment. It also reduces risks of ownership for businesses and end-of-term asset disposal risks.
- By structuring repayments, you can take advantage of potential tax benefits for your business.
- Equipment leasing is a specialist legal area. An equipment lease is a security interest that, in most circumstances, should be registered with the federal government’s Personal Property Securities Register (PPSR).
Benefits of Businesses Leasing Equipment
Businesses lease equipment to reduce company debt, manage the costs of equipment maintenance and ensure efficient use of capital. In turn, this allows businesses to invest in core business operations. Monthly payments can be lower compared to a traditional loan used to buy equipment and assets, which results in a lower impact on a business’ cash-flow.
Lease payments can provide more certainty as they are fixed and predictable. Fixed repayments allow for better budgeting and avoidance of rate fluctuations over the term of the lease.
Businesses also prefer equipment leasing as lease payments may be tax deductible. Provided the asset is used to generate assessable income for the business, lease payments may be partly or fully tax deductible.
The requirement to upgrade equipment can often be a financial burden for business. With equipment leasing, businesses can avoid technological obsolescence.
- Deciding the type of equipment, the term and the rent/lease amount are three key factors to consider before entering an equipment leasing arrangement.
- Is insurance included in the equipment leasing? Does the lease require the lessee to insure the equipment at the lessee’s cost? If so, what coverage is required?
- Ensure you are advised on what will happen in the case of an accident. Who will maintain/repair the equipment? Who is entitled to any manufacturer’s warranties?
Types of Equipment Leasing
Equipment leasing is treated as a loan, whereby the lender buys and owns the equipment and then leases it to a business at a flat monthly rate for some specified months. At the end of the lease period, the business may choose to purchase the equipment at its fair market value, continue leasing or return the leased equipment.
Equipment leasing will depend on the leasing and finance company or financial institution your business contracts with. Equipment finance products include finance lease, commercial loan and commercial hire purchase options.
Also known as rental finance or off-balance sheet borrowing, this is the most common finance method for business equipment. This method will eliminate cash restraints that exist when making that vital purchasing decision, by not having to pay the total amount of the goods up front. The term of finance agreement can be from 1 – 5 years and must be following ATO Guidelines. Deposits are not required. The full purchase price must be financed.
A commercial hire purchase arrangement is a legal obligation between the finance provider and the hirer where the amount repayable is calculated on a fixed term. The hirer has ownership of the goods at the beginning of the term. The term of finance agreement can be from 1 – 5 years. Notably, the amount financed is inclusive of GST. However, monthly repayments are not subject to GST.
Frequently Asked Questions about Equipment Leasing
Q: What are the common types of equipment leasing?
A: Equipment leasing can include computer and office equipment, PABX and telephone equipment, security equipment, office fit-out equipment, industrial and medical equipment.
Q: What is the fair market value?
A: Fair market value is the estimated amount for which an asset should exchange between a willing buyer and a willing seller in an arm’s length transaction after a reasonable time and proper marketing.
Q: What is the difference between an Operating Lease and a Finance Lease?
A: An Operating Lease allows you to pay just for the use of the equipment. A Finance Lease allows you to pay a pre-determined residual amount at the end of the lease term, so you own the equipment outright. Finance Lease is owned by the finance company until the residual payment is made; and then ownership is transferred.
Q: What is a Novated Lease Agreement?
A: A novated lease is a form of salary packaging, where your employer provides you with a benefit other than a cash salary or wages.
How can LegalVision help me?
We have helped many businesses with equipment leasing, and it would be our pleasure to assist you. We provide fixed prices for your certainty and peace of mind. Call LegalVision today on 1300 544 755.
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