You are starting your own small-time business, you are planning this for many months and has all the needed financial resources and capital to start your business. You even imagined the scenario of your business being renowned in your city, but you have only one remaining question. “Do I need to buy all the equipment needed for my business?”
Every entrepreneur who started their own business has at least asked this question for once. Some would seek advice from business experts, some would canvas prices of the equipment that their business would need and calculate the costs and decide for themselves, and some would lease or buy the needed equipment quickly. Whatever your decision is, it still comes down to the effectiveness of your business that would predict your financial gain.
However, for entrepreneurs who have a tight budget and wanted to save some dollars in operating costs, it is vital to weigh the significance of leasing and purchasing individual device. Before considering to lease or buy specific equipment, it is mainly essential to compare the costs of the devices, durability, monthly leasing cost, and the warranty coverage. Business owners need to consider each of those things since business equipment could play a prominent role in the effectiveness of your business. However, in this article, we would focus on the benefit of opting for equipment lease rather than buying them.
Operating Lease
There are two types of methods in leasing your equipment. The first is the operating lease. This method of equipment leasing is prominent in all sizes of businesses and is commonly known as fair market value leases. Operating lease offers a secondary cost compared to the capital lease. The reason why this is ideal and popular for businesses is that renting printers, copiers, and other equipment would not be considered or added as a company asset on their balance sheet. Additionally, companies could save a few dollars in operating expenses since it is more expensive purchasing rather than renting printers and other business equipment. The only point to note when deciding to have an operating lease is the cost in the long-term value of the device, but this is not the case when your company has reached the peak of high revenue since operating lease would not be a huge problem.
Pieces of equipment are only recognized as an operating lease if there is no rent-to-own agreement, the cost of the contract does not surpass 90% of the equipment market value, and the lease life does not exceed to 75% economic value of the equipment. If your contract with your lessor exceeded that qualification as an operating lease, that would be under Capital Lease.
Capital Lease
The Capital Lease would now be easier to understand since we have tackled Operating Lease. This method of leasing your equipment is a less popular option for businesses compared to Operating Lease, but this method makes more sense for companies that want to own the leased equipment. Capital Lease can cost companies more compared to Operating Lease, and they would also add the machines to the company’s balance sheet of assets.
When comparing the Capital Lease and Operating Lease, it would be strategically significant to note that leasing is more beneficial for start-up companies rather than purchasing them at the first place. Not only that you will have the opportunity to save some operational costs, but you can also decide to buy that equipment after your business has grown — a practical strategy for starting your business.
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