Prudent businesses often choose to lease rather than buy equipment, vehicles and facilities. Leasing can be advantageous but the type of agreement you sign is important.
When presented with lease options, you’ll find the ones with the longest terms are generally the cheapest. But you might want to opt for a short-term version instead. Why? If you should experience a business downturn, a long-term lease can be a direct route to a financial crisis.
The risk of signing an extended deal is obvious. You’re stuck with years and years of stiff lease payments — and maybe even penalties if you can’t pay. To make matters worse, the equipment, vehicle(s) or facility might become obsolete or sit idle while you’re still writing checks.
To limit your exposure, consider negotiating short-term leases. Make no mistake: You’ll probably pay a higher rate. But even if you end up paying more, you’ll likely limit your financial exposure if bad times hit.
You’d be surprised how many businesses are unnecessarily encumbered by long-term leases that end up costing more money in the end.
Let’s say you have an opportunity to lease a photocopy machine for five years at $100 a month for a total of $6,000. Instead, you negotiate a month-to-month lease for the same machine at $150 a month. Ultimately, it could be a much better deal.
The reason: If you take the long-term lease and your business runs into financial troubles, or the machine loses its usefulness, you’ll be expected to continue making payments even though no one is using this piece of equipment.
But if you hedge your bets by taking the short-term option, you can send the clunky photocopier packing to lower expenses if times get tough or it becomes obsolete. You’ll likely be able to sign another short-term lease if you really need the photocopier again, though, in this example, you’re probably better off using electronic documents anyway.
Here’s another consideration: If you lease equipment 365 days a year, but only use it 180 days, you’re better off renting with a month-to-month lease at double the daily rate of a long-term lease. Your cost is exactly the same as leasing for 365 days, but there’s no long-term obligation. If you want to get out, you’re off the hook.
As you can see there’s more to leasing that meets the eye. One final point: The tax implications of leasing can be complex, so you should discuss them with your CPA before signing any contract.
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