In the USA, nearly 80% of businesses use financing when acquiring equipment. A lot of those businesses are startups or newer businesses. It makes sense. As a new business, you have less money to play with so leasing equipment is always going to be the more attractive option.
However, as with most business decisions, there are usually risks. There’s no difference when considering equipment leasing. Here are some tips to consider when you’re looking to lease equipment as a new business.
Know Your Terminology
To be able to enter into lease agreements with other businesses, you need to know your terminology. If you’re not sure, then it’s best to read up on it so you can make the right decisions effectively. Equipment leasing comes down to a definition between the lessee, and the lessor.
The definitions of lessee and lessor are very similar to those of tenant and landlord, respectively. The lessee is the party renting the asset from the lessor. The lessor is the party that likely owns the asset and is renting it out.
So, when you approach a business to rent machinery, computing equipment, vehicles etc. you’re approaching as the lessee. If you were to be owning an asset and renting it out, you’d be known as the lessor. In ASC 842 lease accounting, which is the up to date accounting standard in the USA, those are the main terms you’ll encounter that define the lender and the person lending
Get The Right Levels Of Insurance
If something breaks, and it’s your fault, you could be liable for the full cost of the leased asset. If this is something like heavy machinery or vehicles, it could bankrupt your business before you even get started. Always take out insurance. The insurance should be top tier, too.
It should cover breakages for any reason and especially covering accidental damage. Fire and theft should come as standard, depending on the insurer. The person/company offering the asset might offer their own kind of insurance. Consider it, but weigh it up against other, similar insurers.
Practice Good Accounting
When you lease something, you have to account for it. Doing so can be quite tricky. Even accounting firms are known to use lease accounting software to make sure they process leases in line with ASC 842. As a new business you might be doing your own accounts to save some money. However, this does take time and there is a chance you might make a mistake. If you’re going to do it yourself, make sure you take time and do it all properly.
Only Take What You Need
When looking for equipment for your business, you should only take what you need. Take software for example. It’s so easy to pay for more than you need. Software packages can be quite large with you only using small parts of it. Be clear with what you want and you can end up saving some money.
The same applies to quantity. Don’t take too much. It’s clever to anticipate growth, but if it takes longer to grow than usual you’ll be paying for equipment that you’re not using at all.
Business analysts can help you get it right if you’re worried about equipment. Try to model this as best possible before signing any agreements.
As a startup you need to ensure that you protect as much startup capital as possible. If you take too much unnecessary equipment you’ll affect your bottom line. At the same time you need to rent the right amount. If you don’t rent enough it’ll impact your business operation.