If your capital budget is tight, but you need equipment to establish, maintain or grow your business, don't worry. Do what most other companies do: Take advantage of equipment leasing.

Equipment leasing is a viable and very popular option for companies large and small. In fact, 80 percent of all businesses in the United States lease all or part of their equipment, according to the Equipment Leasing Association (ELA).

That's not surprising, given the broad benefits of equipment leasing. This creative financing option offers business owners the best of both worlds: It allows you to pay only for the value of the equipment that you use during the lease term, rather than purchasing the equipment outright.

More specifically, the company selling the equipment simply makes a direct referral to a leasing company. The lease financing company buys and owns the equipment and then "rents" it to you for a fixed monthly fee over a set period. Leases can range anywhere from $2,000 to $2 million, with terms running 12 to 60 months.

Equipment leasing-which is suitable for any business at any stage of development-can be used to finance all types of equipment. Leases typically involve items such as office equipment, computers, and trucks and vehicles. But equipment leasing can also be used to finance software, hardware, consulting, maintenance, freight, and installation and training costs.

Benefits of Equipment Leasing

Equipment leasing gives you the ability to have the latest equipment for business, plus transfer the risk of technological obsolescence to another company. Leasing offers flexible terms and customized options that take into account your needs regarding cash flow, budget, transaction structure and seasonal fluctuations. And there’s generally no down payment or collateral required with equipment leasing.

By leasing instead of buying equipment, you can leave money in the bank that can be devoted for other expenses. Since lease payments are usually smaller than regular loan payments, you don't have to pay out as much each month. You don't make use of your bank loans or lines of credit to lease equipment, and in general, a lease obligation is not carried on the balance sheet of your company. Also, the payments for leasing business equipment are generally tax-deductible.

Additionally, an equipment lease is generally more easily obtained than traditional bank financing. An application for a small-ticket lease of less than $100,000 is generally no more complicated than a credit card application. However, leases for more than $250,000 require detailed financial information from the business and a more thorough credit analysis.

Common Types of Equipment Lease Agreement

Lease agreement terms vary according to the financing company. However, the lease structure is generally affected by your credit rating, transaction size, asset type, industry and location. The key to getting the most suitable type of lease is to match the agreement to your equipment needs, cash flow requirements and overall business goals.

When considering a lease agreement, here are some important points to keep in mind. Most lease agreements require you to be responsible for the equipment for only as long as it is in your use or possession. In many leases, you're responsible for the burden of maintenance, interest, taxes and insurance. When the lease ends, you can opt to purchase the equipment for its fair market value (or a fixed or predetermined amount), continue leasing it, return it or lease new equipment.

Operating and finance leases are two of the most common types of lease agreements. With an operating lease-also known as a "true" or "fair market" lease-the goal is not to pay for the equipment. This type of lease is particularly attractive to companies that continually update or replace equipment and want to use equipment without ownership, but also want to return equipment at lease-end and avoid technological obsolescence.

An operating lease usually results in the lowest payment of any financing alternative and is an excellent strategy for bypassing capital budgeting restraints. It typically qualifies for off-balance sheet treatment and can result in improved return on asset due to a lower asset base. And it can also result in higher reported earnings in the early years of the lease.

The finance or capital lease is ideal for companies that want to own their equipment once the lease agreement ends, but prefer to use the benefits of leasing to acquire equipment. A finance lease is a non-cancellable, full-payout, agreement, in which the lessee is responsible for maintenance, taxes and insurance. This kind of agreement is most appealing when the lessee wants the tax benefits of ownership or expects the equipment's residual value to be high. The lessee purchases the equipment upon lease termination at a pre-set amount. The term of a finance lease tends to be longer, nearly covering the useful life of the equipment.

10 Questions to Ask Before Signing an Equipment Lease Agreement

When considering an equipment leasing contract, make sure you do your homework to negotiate the best terms for your business. The ELA recommends asking the following 10 questions before signing any lease agreement.

1. How am I planning to use this equipment?

2. Does the leasing representative understand my business and how this transaction helps me to do business?

3. What is the total lease payment and are there any other costs that I could incur before the lease ends?

4. What happens if I want to change this lease or end the lease early?

5. How am I responsible if the equipment is damaged or destroyed?

6. What are my obligations for the equipment (such as insurance, taxes and maintenance) during the lease?

7. Can I upgrade the equipment or add equipment under this lease?

8. What are my options at the end of the lease?

9. What are the procedures I must follow if I choose to return the equipment?

10. Are there any extra costs at the end of the lease?

Capitalizing on equipment leasing can help your business maximize resources while minimizing costs and risks.