The Activities of Equipment Leasing Companies
The word leasing has become one of the most used when talking about setting up a business under a franchise due to the high cost of properties or machinery that makes leasing a way to deal with all recurrent costs involved.
The leasing contract is one by which the Equipment Leasing Company transfers the right to use equipment in exchange of a rent for a specified period, after which, the lessee has the option to purchase the leased property by paying a price, return or renew the contract.
If your company chooses purchase the equipment from the Equipment Leasing Company, the price would be residual and it will be calculated on the basis of the original price or the good plus an interest rate including other expenses. If your company chooses not to buy the equipment, it is bound to either return it to the Equipment Leasing Company or extend the contract.
Your company can decide between three kinds of leasing options:
One which we will call Financial. In this one, the Equipment Leasing Company buys the equipment for your company to use. However, your company would be responsible for all maintenance and repairing costs related to the equipment. The main attractive of this option is the accelerated depreciation which saves you money in taxes.
The second is a more Operational one. In this one, your company signs a contract with the Equipment Leasing Company which will cover not only for the use of the equipment but also for maintenance and reparation.
Back Leasing. In this one, the Equipment Leasing Company buys the equipment from you and then leases it back to your company. They pay for the sale but you can continue using it after paying a fee. This one does not have any tax benefit.
But what is the cost of such a measure? There are two types of costs; one is the cost of depreciation, the most expensive one, and the cost of borrowing money.
Leasing is made more attractive thorough the usage of Granting. This is a method that companies use to increase the residual value of the excess in their inventory to make it greater than their present value in order to pay smaller monthly leasing fees.
You can calculate the ultimate cost of leasing by adding the cost of depreciation on the equipment, plus the interest rate an always considering the tax reductions that come from it. The interest rate can be beneficial for companies with little capital.