As businesses pivot and recover from the aftermath of the COVID-19 pandemic, it may become necessary to acquire new equipment to cater to changing market demands. However, most companies are running on low capital reserves, having survived a fall in revenues with operational restrictions and supply chain disruptions in the last year and a half. Leasing might be a lucrative option for enterprises with limited capital to invest in the latest equipment and tap into opportunities as markets open up.
Despite the widespread adoption of leasing, there are still several myths around leasing equipment for business. Should organisations buy or lease essential equipment? Are there limitations to the use of leased equipment? Equipment loan v/s lease, which is better for business when?
Here are common myths around equipment leasing and some guidance on how organisations can make an informed decision:
Myth 1: Leasing is expensive
It is often misunderstood that leasing is an expensive alternative to buying equipment. In contrast, leasing is as competitive if not cheaper than conventional financing alternatives. Furthermore, with the pace at which business environments are evolving today, the chances of the equipment becoming outdated are higher. Obsolescence of assets leads to more losses as companies need to frequently upgrade the core assets to stay competitive and relevant.
Depending on the lease structure, companies can also benefit from tax savings, further reducing the overall cost of equipment. Lease rentals paid in operating leases are eligible for a tax deduction, thereby reducing the taxable income. Companies leasing assets under a financial lease can also claim maintenance and depreciation costs that increase tax savings.
Additional Read: 6 Factors to consider before leasing equipment
Myth 2: Leasing essential equipment is not good for business
Another common misconception is that leasing must be used only for non-core assets. Leasing essential equipment rather than owning it is misconstrued as a company of poor financial health. However, this is incorrect. Leasing is good for any kind of core or non-core equipment subjected to periodic use or frequent upgrades.
Industrial manufacturing equipment critical for the organisation and used for 20 or 30 years can also be leased. Such leases typically include a fixed purchase option or early buyout option where businesses can exercise the right to own the asset in the future. Flexible lease structures provide companies with all the advantages of leasing while ensuring that they can ultimately retain the equipment and continue employing the asset even after the lease expiry.
Myth 3: Leasing is not applicable for all kinds of equipment.
Companies often believe leasing is restricted to cars or laptops and specific niche equipment, which is not true either. Leasing is applicable for all kinds of equipment, including short-term and long-term equipment.
While leasing is relevant for automobiles and computers prone to technological obsolescence, it is also a lucrative financing option for companies looking to invest in core manufacturing equipment with longer lifecycles or intangible assets like software. Futuristic lenders like Tata Capital offer diverse leasing solutions to finance varied investments required to run a business.
Myth 4: Leasing is restrictive with no flexibility
Often, companies refrain from entering into a leasing contract because they believe it’s restrictive and locks businesses in with no way out during the lease tenure. But this is a myth.
Equipment leasing is a flexible contract allowing businesses to finance up to 100 per cent of the equipment cost with no down payment. Leases can be customised to have repayment modules that match income streams. In fact, leasing provides greater operational flexibility than other financing options such as getting a loan. At the end of the lease term, depending on the nature of the contract, organisations can choose to purchase the equipment, renew the lease agreement, or return the asset back to the lessor.
All lease agreements have a predetermined exit clause that allows companies to foreclose the lease in case of a change in business circumstances. At Tata Capital, we offer complete transparency to ensure lessors are fully aware of the lease terms before entering the contract.
Additional Read: What end of lease options should be explored before leasing equipment?
Myth 5: Leasing is just another form of financing
Leasing is not just another form of financing; it is much more than that. Unlike traditional loan forms, leasing companies offer several other services besides advancing funds to purchase equipment.
Leasing companies handle the administration and payment of purchase orders along with the complete logistics for collecting the equipment at the end of the lease term. They also provide online reporting tools that provide transparency, flexibility, and control over the leased assets. With over a decade of experience offering leasing solutions, customers across industries rely on Tata Capital to lease their equipment. Need more information and guidance on Equipment leasing? Reach out to our experts at Tata Capital.