Aside from the strategic considerations, there are additional tactical rules of thumb to consider. Nothing in the world remains static, including how a business uses equipment. “After two years, almost all the time you’re going to want to upgrade or downgrade,” says Arleen Kahn, president of AMK Associates, a New York-based cost-management firm. Even if equipment will hold its value, a business might find it no longer suitable. Kahn tells the story of a client who had purchased a copy machine before downsizing the company. “He went from three floors to two floors to one floor,” she explains. As the number of employees dropped, so did the demands on the copier. The copier was still valuable, but was too much for the downsized company.

Had the client leased the copier, the company might have traded it in and taken something smaller. With a lease, the lessor—whether a bank or dealer—still owns the equipment and cannot effectively ignore you because it has a stake in case of a problem. With many types of equipment, dealers are willing to do buy-outs of an old lease to sell a company into something with more capacity (read: more expensive) by spreading the remaining payment total over the life of the new lease. For that reason, Kahn suggests that, if you are leasing, take an agreement no longer than three years—enough time to pass the two-year change mark, but not so long that the total buy-out adds too much when spread across the monthly payments.

If equipment is under $5,000, Kahn generally suggests buying, if possible, because the replacement costs may not be worth the interest expense of a lease. Even if purchasing is the best strategic decision, Kahn suggests considering a one-year lease with a buy-out option at the end. Business equipment often has a 90-day warranty. The one-year lease, while adding some interest, becomes a way of effectively getting an extended warranty without committing to a multi-year service contract. “Let’s say something really goes wrong with that piece of equipment and you feel that they’re not responding to your needs after the 90-day [standard warranty],” she says. “You have leverage.”

Under rare circumstances, says Winmill, a business should consider an operational lease, which is an arrangement with no end-of-term buy-out available to the business owner. In effect, an operational lease is a long rental arrangement under which you basically finance the equipment for the dealer. Afterward, the dealer sells the used equipment and gains the equity as further profit. “You’re playing poker with a guy named Doc,” Winmill says. That’s fine if you absolutely know that owning the equipment would make no sense, but if there is a chance you will want to hold on to the equipment, then it’s a big mistake. A related issue is watching the buy-out price. If the lease agreement refers to a fair market value, there should be some specified way of determining that number, otherwise you could be leaving your final payment up to the whim of the lessor.


TEN QUESTIONS TO ASK

Leasing equipment can been tricky, especially if you’re leasing for the first time. The Equipment Leasing Association recommends businesses ask the following 10 questions before signing a lease. These questions take into account the “before, during and after” stages of a lease.

Before

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?

During

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? Is there a penalty?
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?

After

8. What are my options at the end of the lease?
9. What procedures must I follow if I choose to return the equipment?
10. Are there any extra costs at the end of the lease?

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