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Leasing Plant & Equipment

Small business start up information

1. What sort of equipment can you lease?

2. What is hire purchase/ finance lease?

3. What is an operating lease?

4. Who takes care of the maintenance of the equipment leased through an operating lease?

5. Are leases legally enforceable?

6. What should I consider before entering into either a operating lease or finance lease?

7. Should I bother to shop around?

1. What sort of equipment can you lease?

You can lease most types of fixed assets, such as:

2. What is hire purchase/ finance lease?

Hire purchase and finance lease are interchangeable terms for the same type of lease.  I shall refer to them as a finance lease here on in.  A finance lease is often preferred for financing long-term moveable assets. It requires you to make a down payment and to pay off the rest (both interest and capital) over a period, usually five years or less.

The interest rate charged is usually higher than for a bank loan, but repayments are fixed under the initial contract. The hirer retains ownership of the asset until the final payment is made.  At the end of the hire purchase contract  you will generally have the option to purchase the equipment outright for an agreed value (usually market value). If you fall behind with payments the financier has the right to repossess the asset.

You may claim depreciation against tax on assets acquired under hire purchase.

3. What is an operating lease?

You may prefer leasing because it lets you avoid technical obsolescence without overspending - for example, a large percentage of computers are leased and replaced or upgraded within 24 to 48 months - so you could lease a computer and replace it regularly.

Leases require no down payment and normally no collateral. When you lease equipment, a leasing company either buys or already owns the equipment. At the end of the lease you usually have the choice of buying the equipment, returning it or extending the terms of the lease.

4. Who takes care of the maintenance of the equipment leased through an operating lease?

Most leases include periodic maintenance, insurance and discounts on consumable parts.  In addition to freeing up your cash and leaving your conventional lines of credit open, lease payments are usually 100 percent tax-deductible as a business expense. Compare this to bank loans where only the interest portion is deductible. However, you cannot claim for depreciation on leased equipment, unlike equipment purchased under a loan or hire purchase agreement.

5. Are leases legally enforceable?

Before you sign any lease, be sure you understand all the terms and conditions of the agreement., it is a contract and once signed you are legally bound by the terms of the lease.   If you decide two months after you sign the lease that you don't need the equipment or need another type, you could experience problems.  In fact some companies won't release you from the contract, which could leave you paying for unneeded equipment for years, others will charge you a hefty fee to terminate the contract. Your accountant can help you decide whether leasing is a good option for you and recommend the types of leases that suit your specific needs.

6. What should I consider before entering into either a operating lease or finance lease?

What specific types of equipment do I need to grow my business, and for how long will I need this equipment?

• What can I afford in monthly payments?
• How are the payments calculated?
• What are the tax pros and cons?
• Can I get a sample copy of the lease being offered so my accountant and I can study its terms at our leisure?
• How is this lease / hire purchase agreement terminated?
• What are the buyout options? Are they negotiable?
• Can I upgrade at no cost? If so, within what time limits?
• How flexible is the payment schedule?
• Are there any incentive programs available?
• What's the average turnaround time on my application?
• What are the conditions for servicing or replacing the equipment? Is there a 24-hour maintenance service?
• What are the maintenance estimates on the equipment? Am I responsible for ordering and paying for replacement parts, such as printer toner?
• Are shipping costs, installation, training or warranties included in the payments?
• Will I be charged documentation fees? What are the late-charge fees?
  

7. Should I bother to shop around?

Most definitely, don't jump into the first lease offered. Take the time to shop around for the equipment you need and the lease that is most appropriate for your cash flow, business needs and income.  Ask questions and get responses in writing, if necessary. Leasing equipment can be a boon to business people who are short on capital but long on potential; just make sure you understand how it affects your financial picture and future growth. Above all, don't sign up until you understand every clause in the agreement you're considering and its implications for your future growth.