The Risks of Commercial Equipment Leasing
Commercial equipment leasing is an option for business owners who do not want to purchase the machinery or equipment outright. Most business owners who choose this option believe they only need the equipment for a short period of time or that the technology of the equipment will quickly be outdated. A commercial equipment lease is popular among new businesses for these reasons. While the idea may sound attractive and less expensive than financing, there are also many risks with equipment leasing.
Damaging the Asset
Just like when you lease a car, when you lease a piece of equipment, you do not own it. This means you are not at liberty to damage the asset in any way. When you damage a piece of property you own, you can elect to repair the property or leave it damaged. For example, a heavy tractor may have scrapes, chipped paint or other damages. Before the tractor is returned to the leasing company, these damages must be repaired according to the terms of the lease. Getting insurance on leased equipment can be more expensive, but a borrower will need this to afford the repairs.
Altering the Asset
You cannot alter an asset you do not own. With some types of commercial equipment, this will not be an issue in any way. Other types of equipment, however, may require specifications the borrower would like to modify. For example, if a business leases computer equipment, the IT specialist at the company may determine the computers need an upgrade or alteration to perform better. While a business owner would be at liberty to make these changes on owned or financed equipment, they would not be able to do this with leased equipment.
Negligible Credit Benefits
Performing well on a lease has negligible credit benefits for the leaser. If this same business owner were to purchase the equipment and make payments, the business's credit would go up with each correct payment. A lease is much less risky for the leaser, meaning the affect on credit will be reduced tremendously. A business needs credit to get future financing, attract investors, and build a positive balance sheet. Without credit, a business will always rely on the credit of the business owner to grow financially in these circumstances.
No Asset Benefits
Growing business assets prepares a business for the future. For example, a business needs assets to attract investors, make a public offering or sell to another company. Most business owners see their new company as a potential asset base in the future. Without equipment, this asset base is much smaller. Some investors or potential purchasers will be impressed with your profit alone, but most will want to see your business has assets for purchase in order to make you an offer. These assets will also protect you if your business goes bankrupt. They will be a source of equity to tap into to pay off loans so you do not personally get stuck with the bill.