You are expanding your business or updating equipment and you have decided to lease the equipment. You contact your lease company and give them the equipment quotesand they write one master lease for all of the equipment. You don’t think anything about it until you decide to replace one item a few years into the lease. When you call to pay off the item you learn you have to pay off the full lease to remove any of the items. What your leasing company should have evaluated before they wrote one lease and what you should evaluate before leasing equipment.
Simple tidbits on how your decision could impact your business.
- Equipment leases are designed to be full term payouts. Most banks/finance companies charge the full amount of the monthly payments even if you pay the lease off early. Though some banks/finance companies offer discounts on the overall payout many do not or even charge a penalty to pay the lease off early. With this in mind you should carefully consider the useful life of each piece of equipment before deciding to lump it in with other equipment. For example, a medical practice is opening a new office and has decided to lease the equipment, tables, furniture, computer software/hardware and other tangible items for the business. The software and hardware has a useful life of 3 years or less for their office; however, the patient tables, lights, furniture, x ray machines and other equipment may have 5-10 years useful life. In 3 years they would like to purchase new computers and software and pay off the lease they have on their current systems. If they leased everything they purchased in one master lease, they would essentially have to pay off the full amount of the lease for all of the equipment to separate out those items. This could be a financial hardship and could end up costing the practice more money. Also, it could inhibit the ability for the practice to stay cutting edge in their equipment.
What should you do to ensure you make the proper decision for your business growth?
- Evaluate each item you are purchasing based on the following items:
- How quickly technology changes
- Whether each item can be upgraded or replaced
- Manufacturer’s warranty and it’s estimated useful life.
- Cost of equipment relative to overall lease amount
- Speak to your leasing contact and request the following information.
- What is their early pay off policy.
- Can items can be separated from lease if you decide to upgrade.
- Do they offer a master lease with a separate schedule and UCC filing for each piece of equipment, thus allowing you to upgrade or payoff items separately.