Commercial Equipment Lease Agreement
Leasing is an alternative financing method to acquiring needed business equipment as opposed to straight financing. Leasing allows a business to, in essence, only pay for the depreciation of the equipment over a given time frame and then at the end of the lease either purchase the depreciated asset or trade it for a new lease and new equipment. There are added tax advantages to leasing. Leasing allows a company to hold on to valuable cash capital and use the profits the equipment generates to pay for itself over time.
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Leasing
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Leasing is nothing more than a long-term rental agreement. When signing a lease the business agrees to make payments on a regular basis (usually monthly, sometimes bi-monthly or quarterly) to have possession and use of the equipment. Leasing differs from financing because at the end of the lease terms there are different options for the disposition of the equipment. The total lease amount may be enough to cover the total cost of the machine (the business retains possession), the equipment may be taken back by the leasing company, or a simple trade of existing for new can mean the business can operate with another lease and new production equipment.
Collateral
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Leases require either corporate or personal guarantees. A corporate guarantee means that if the lease goes into default (the business stops making payments as agreed), the leasing company can take possession of the equipment and liquidate it to settle the lease balance. If the liquidation proceedings are not enough to cover the lease balance, then corporate assets are used to satisfy the outstanding amount. A personal guarantee is identical to a corporate guarantee except a person's property (business, home, financial investments) may be used to satisfy the lease balance. All collateral is registered legally with a UCC (Uniform Commercial Code) listing in the local county records office where the business is located.
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Balloon Payments
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Leases often use a balloon payment. This means the monthly payments are comparatively lower than would be the case without the balloon payment. At the end of the lease term, however, a single payment is due that equals several months (or a year or more) of combined payments. Businesses at this point usually decide to either return the equipment or refinance the balloon amount and continue making payments. Very profitable business might even have the capital to make the balloon payment and settle the lease terms.
Lease Purchase
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A lease/purchase is financing the equipment by any other name. Monthly payments are made and at the end of the lease period the amount paid coincidentally equals the total amount due on the lease and the balance due is zero. The lease/purchase agreement allows the business to deduct the lease payments from taxes as a business expense and also use the equipment depreciation as a tax deduction.
Lease Terms
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Lease terms can be set at just about any amount of time agreed to by the business and leasing company. Usually, though, leases do not exceed 60 months since five years is the maximum amount of time equipment can be depreciated for tax purposes. Businesses have been known to lease equipment for as little as three months. This allows the business to get a vital piece of equipment to produce an order that is profitable enough to pay for the machine after only 90 days production.
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References
- Photo Credit HEAVY EQUIPMENT image by brelsbil from Fotolia.com
