Three key questions to ask when considering leasing

December 30, 2015

One of the first things small to medium-sized businesses should ask themselves when considering an equipment finance solution is whether a lease is the best option, and if so, how they plan to use the equipment. More specifically, they’ll need to understand how they will derive value from any new asset acquisitions and optimise their return on investment (ROI).

David Miele, Senior Vice President of Citizens Asset Finance, Inc, can help to answer the first question. “There’s a reason that seven out of 10 companies lease or finance their equipment,” he explains. “It makes good business sense.”

However, not having a plan for the equipment needed and how it can best be utilised is the opposite of good business sense. An equipment finance provider will be able to advise on best practice in many ways, but it is also worth looking at your operations to see where the challenges lie. From there, you should be able to take the first step to understanding what equipment your business needs.

1.   What is your aim?

The September 2015 Alleasing Equipment Demand Index (the Index) shines a light on why many businesses choose to lease new equipment, which also goes some way towards determining its usage.

With an aim to overcome budget challenges, the Index shows more than one third (34.9 per cent) of companies are investing in their asset base to work around budget constraints and still develop new products and/or services. In a bid to drive a competitive advantage, up-to-date equipment could help to deliver new goods or services of a higher quality to your clients while keeping the bottom line intact.

Meanwhile, a quarter of those surveyed in the Index are purchasing to increase their business’ equity. Nearly 10 per cent are leasing new assets to partner with associated/supply chain businesses, while a similar percentage of respondents (nine per cent) are planning to reduce their operating costs or expand their geographical presence domestically.

Finally, 8.6 per cent of the surveyed businesses were looking to use their growing asset base to enter offshore markets or extend their current lines of credit, while 4.9 per cent wanted to sell or dispose of their unnecessary business assets to meet budget demands.

2.   How will you use the equipment?

With a number of equipment finance options available, how you intend to use the equipment may dictate the best financing option for your business, and will impact how your equipment financing is structured.

Whether you’re investing in new manufacturing machinery, heavy vehicles for agriculture, or IT equipment, you will need to determine how often it will be used and, more importantly, how business-critical that equipment is to productivity and growth. Some will be everyday assets, equipment that you rely on to crucially perform your core business functions on a day-to-day basis; others might be used to more limited degrees during the initial phases of a new construction project, for example.

Becoming mindful of your projected usage will also allow you to create a cost/benefit matrix, with your revenue expectations weighed up against your monthly expenses.

3.   What’s the best option?

An important consideration should be what to do with the equipment once the lease term is over. You may want to continue the lease on a month-by-month basis, alternatively upgrade the equipment and start a new lease, or pay off a residual to take ownership of the asset.

For instance, a finance lease allows you the option to pay out the residual to own the asset outright once the term (usually between two to five years) is complete. A finance lease is most appropriate when a business wants access to long-life equipment, such as vehicles or heavy machinery, and defined cost of end-of-term ownership.

In contrast, an operating lease or rental agreement .

Once you have considered all three questions, it should be easier to see where your ROI will come from. Should you need to use the equipment for longer to receive a higher ROI, this can be factored into your lease agreement, which will be tailored to the equipment lifecycle.

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