Small and medium-sized enterprises (SMEs) often face financial constraints when acquiring new equipment due to the high upfront costs. Leasing machines provide a lucrative alternative as they enable SMEs to access high-quality equipment without making a significant financial investment upfront.
This practice has become widespread in developed countries, and Asia Pacific leads the global machinery leasing market with a 37.3% share, followed by North America and Western Europe. Africa and South America are expected to experience significant growth in this market, with the Middle East and Eastern Europe not far behind.
Before deciding whether to lease or buy equipment, SMEs need to understand the benefits of leasing. Leasing machinery allows SMEs to get costly equipment that may be difficult or impossible to purchase outright while avoiding liability on their books.
Here are the top three factors for SMEs to make informed decisions when leasing equipment, maximize their operational efficiency and reduce their costs:
- Types of Leases: SMEs must understand the different types of leases available, as they can significantly impact their accounting and taxation policies.
There are two main types of leases:- operating leases
Operating leases are rental expenses and are not recorded as liabilities on the company’s books, making them an excellent option for companies that need equipment for a limited period or require the latest equipment that requires frequent upgrades. - finance leases.
Instant leases taken out on high-value equipment and transfer ownership to the lessee at the end of the rental period. This type of lease is suitable for companies that need the equipment for the long term and can afford to take on the asset’s ownership. SMEs must evaluate which option is the most suitable for their business needs.
- operating leases
- Rental Frequency and Lease Tenure: Rental frequency and tenure significantly impact the cost of leasing equipment and the value the lessee can derive from it. The rental frequency refers to the frequency at which the rental for the lease needs to be paid, while the rental tenure refers to the term of the lease. SMEs should address several questions before signing the agreement, such as the rate at which the equipment can be bought after the lease, whether there is a lease extension option, and how to return the machinery. Answering these questions will require an open and transparent conversation with the lessor.
- Deposit and Residual Value Deposit: The deposit or upfront payment required by the lessor should be evaluated carefully and compared with multiple leasing companies to find the most affordable option. Sometimes, lessors may charge a high deposit, which is only justifiable if the returns from the machinery are high. Therefore, SMEs must consider this commercial aspect before finalizing a lease option. The residual value refers to the asset’s value at the end of the lease period and is essential for SMEs to decide whether to return the equipment or keep it for their business. SMEs must accurately estimate the residual value of an asset to make the right decision.
In conclusion, leasing machinery is a convenient and cost-effective alternative for SMEs acquiring high-quality equipment. SMEs must consult with experts to understand all the nuances of leasing before deciding which option is best for their business needs.
(This article is written by Shrikant Goyal, Managing Partner & Co-Founder, GETFIVE, and the views expressed in this article are his own)
