If you are starting or expanding a business, you would be aware that equipment can represent a large cost. Although in an ideal world, you would be able to meet that cost outright, the reality is that you may not have the capital to meet the costs of all the equipment you will need to get your venture off the ground.
One option that you might want to consider is to lease the equipment, rather than purchasing it. However, if this is the path you are looking to go down, it is vital that you understand what it is you are signing up for and seek advice from experienced business lawyers if you are unsure.
Benefits and pitfalls for leasing equipment
One of the obvious benefits to leasing equipment, rather than purchasing it outright, is that the initial cost is reduced. Instead of a large lump sum, the cost of the equipment is spread at a lower monthly rate over months or years. This, of course, can be attractive because you are able to immediately use the equipment and make money from it without outlaying all the funds upfront.
Another advantage is, that unlike with owning equipment outright, you may have the opportunity to upgrade the equipment more frequently. This means that you do not risk purchasing an item that may soon become obsolete as technology improves. It may also provide an opportunity to upgrade to more modern equipment more frequently if you choose a shorter lease term.
A further advantage, depending on your lease, is that the equipment provider may also offer service agreements giving you peace of mind. While this is usually an ‘add-on’, this can reduce the need to have in-house technicians and save time and money in trying to identify the right tradesman if you need repairs or maintenance performed.
If the equipment is used for business purposes it is likely that the lease payments will be tax deductible.
With all of that in mind, there can be disadvantages in leasing equipment. As with any contract, it is important to consider all the terms and conditions to ensure that you know what you are getting. While the terms of the lease are primarily to first protect the lessor, a proper review of the contract will ensure that you are not burdened with unforeseen costs or obligations.
One disadvantage of leasing equipment is that there will be a margin built in for the lessor. That is, you are likely to pay more for the asset than if you had purchased it outright. If you are not sure what the terms of the lease mean, it is important to ask questions of the lessor or get some professional advice. It is not uncommon for a lease to include fees additional to the lease payment or rental cost, so understanding what those fees are is important. If a lessor is unable or unwilling to explain their contract terms, this could be a bad sign.
A further disadvantage is that you cannot change the equipment to suit your purposes. That is, you will not be able to modify or alter the equipment and must use it as is.
How does an equipment lease work?
Equipment leases operate similarly to rental leases. That is, the owner of the equipment will draft an agreement outlining the terms, including any monthly fees. The lessee enters the agreement and is allowed to use the equipment throughout the term of the lease (usually several years) until the expiry.
Depending on the terms of the lease, it might be possible to purchase the equipment at the end for the current market or another value. If your lease agreement does not have a purchase option, or you do not want to purchase the equipment, it will be returned to the lessor at the end of the lease. If you want to have the option to purchase the equipment at the end of the lease, it is important that this is included in the contract.
Key terms and terminology
Equipment leases generally include key terms which are common across leases. Some of the key terms are:
- Lease duration, which will be the period for which the lease will continue and may depend on the needs of the lessee.
- Equipment market value, so that the lessee can assess the insurance costs needed to protect against damaged or lost equipment.
- Financial terms, which will outline the payments to be made to the lessor, the frequency of those payments, and any other factors relevant to the payment of fees.
- Renewal options, which are guidelines of how and when a lease can be renewed or extended.
- Cancellation provisions, if applicable, to demonstrate how and when a lease may be cancelled.
Some leases of equipment can be registered on the PPSR to protect the lessor’s interest in the property. It is desirable for an equipment lease to be registered if possible as it protects the title in the equipment and makes recovery easier if a lessee fails to pay as required under an agreement.
For a lease to be registrable on the PPSR, the lessor must be in the business of leasing, and the lease must be for more than two years (including a lease of less than two years with automatic renewal), or an indefinite term where the lessee has had continuous possession of the goods for at least two years.
Leasing equipment can be an ideal solution to help expand your business without having to find or outlay up-front capital. it is important however to be aware of all the terms and conditions so you can make an informed decision.
This information is for general purposes only and we recommend you obtain professional advice tailored to your individual circumstances.
If you or someone you know wants more information or needs help or advice, please contact us on (07) 4671 1266 or email [email protected].