Equipment leasing in the UK, has recorded strong growth in recent years. There are many different reasons as to why so many businesses feel comfortable, acquiring new equipment through leasing as opposed to an outright purchase. For example;
- Leasing is a more cost-effective way to invest in new equipment while maintaining cash or preserving lines of credit
- Immediate access to equipment at the point it is needed
- Flexibility gained from having access to a wider range of funding options
- Avoidance of risk on asset utilisation
- Upgraded technology
- Access to equipment repairs and maintenance
Of course, each business will have to factor in its own situation and financial considerations, but the overall decision must be company specific.
The two most frequently discussed leasing options are finance leasing and operating leasing. In addition to these two types, you can also find an array of options specifically tailored to your business requirements, offering benefits that cut across a mixture of equipment types.
These options can seem complex, and it can be difficult for businesses to understand how variables are used to form the equations, which define the lease. Also, how do these variables interact with each other to calculate precisely what happens at the end of the lease term?
Just imagine, that you need to employ specific equipment for an extended period of time that is central to your company’s operations. You may decide to avoid operating leases that have a fair market value, residual or buyout. If the buyout or residual appears high and having the lessor or bank reclaim the equipment will cause serious disruption to the business, then the company needs to protect its investment. For example, you have a warehouse stacked full of working equipment racks, and you wouldn’t want somebody coming in to tear out all of your racks at the end of the fifth year if you depend on these racks to run your business for the next 20 years.
In this instance, you would probably opt for a guaranteed buyout provision or a long-term finance lease. With a finance lease, you are granted most of the risk and rewards of full ownership, including any maintenance costs, but would be unlikely ever to own the asset outright. This option could help you avoid the risk of disruption by having your lease run out early.
Alternatively, you could consider the ultimate policy too ‘own something that has a long useful life’ – like equipment racks – ‘and lease things that have a short useful life’ – like technology or higher use equipment.
On the other hand, some companies will primarily adopt an operating lease as a solution. This could be because they mainly work on short-term contracts, or they could have just won a profitable deal, that requires the use of a specific piece of equipment for a short time. In this instant, you could de-risk the acquisition by utilising an operating lease for the useful period, while having the option to upgrade if required.
Roy Royer of Somerset Capital agrees there is a strong need to consider a full range of options in the leasing market. “The more solutions you can come up with for customers where they feel like they have a little more flexibility, the better,” he says. For example, a company may start out with a relatively short 24-month lease for production equipment, because it’s booked a 12-month backlog of orders and the outlook for another 12 is good. By adding in a fixed purchase option, says Royer, “they basically know they can have a test period. Going in, they will know they can walk away in 24 months, if they want, or buy it for the fair market value.”
Understanding your unique reasons for obtaining a lease, will ultimately determine if the benefits outweigh the risks, the specific type of lease that will most help your business and the terms of that lease.
Finding a partner that truly cares about your business can make a situation that would otherwise be quite daunting, seem easy and enjoyable.
For over 30 years, Somerset Capital Group has been providing customised, equipment finance solutions globally. Using our extensive industry knowledge to develop tailored finance options, specific to your needs.
Helping some of the UK’s leading businesses, we understand your business requirements and know what your customers want. We are continually evolving to find the right path to support all aspects of your business needs.