Alternatives to Purchasing Equipment
If you wish to acquire business equipment other than by outright purchase for cash, you have various alternatives. You may seek a bank loan or you may choose to purchase the equipment from the supplier by instalments. Commonly, however, various forms of leasing may be the appropriate route.
There are two basic forms of leasing. You may either wish to effectively finance its acquisition or you may simply wish to use the equipment for a limited period.
Before you make any decision (firstly about whether to purchase, borrowing funds, or lease, secondly about which of the two forms of leasing to adopt, or thirdly as to the details of a specific leasing contract), we recommend that you take professional advice about accounting, tax, capital allowance, and balance sheet consequences. These aspects can be complicated in relation to leasing and vary depending on the particular commercial and legal terms of the leasing contract in question.
Leasing for Acquisition
Within this option, there are two alternatives – a finance lease or lease purchase. They both result in you taking over full effective responsibility for the equipment, and involve similar documentation; similar rental payments (both are financial instruments with rental based on repaying the finance advanced together with an acceptable return on capital).
However, they differ in one important respect. With a finance lease, there is no option to purchase. This means that the lessor is the owner. Under lease purchase, the lessee has an option to purchase.
The acquisition of equipment by finance lease or lease purchase usually involves you, the equipment supplier and a finance company. In small-ticket transactions (where lower-value equipment is involved) it may well be that the supplier introduces you to a finance company in return for which he will receive a small commission from the finance company. In big-ticket transactions, it will normally be up to you to make your own arrangements with a finance company either directly or through an intermediary leasing broker.
In most transactions, you will initially choose the equipment to be purchased by the supplier. The supplier then sells it to the finance house and the finance house will then supply it to you under the terms of the finance lease or lease purchase agreement. Prior to selection of the goods, you may well be asked to sign an agreement appointing you as the purchasing agent of the finance company.
Leasing for Use
If your intention is simply to use equipment for a limited period of time only, without acquiring it, an operating lease may be appropriate. An operating lease is distinguished by the fact that the lessor will generally continue to have responsibility for the goods. An operating lease is more typically used where the assets have a residual value at the end of the lease period from which the lessor can benefit by re-hiring the goods or selling them to a third party. This is common for goods where there is a well-established secondhand market (e.g. cars and construction equipment). The lease period will usually be for two to three years, although it may be much longer, but is always less than the working life of the machine.