One of the biggest reasons small business owners lease equipment is to efficiently lower initial expense. Instead of making a down payment for an expensive but necessary equipment, they can simply start making monthly payments after the lease starts.
This is a leverage for young businesses, particularly those in need of very expensive equipment to ensure operation. Leasing is considered an alternative small business financing option. It is an option entrepreneurs can use to get what their business needs presently with less money out of their pocket.
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What is a Leasing Transaction?
Leasing transactions involve a contract between a lessor (usually equipment dealers or financial firms who specialize in leases) and a lessee (that’s the business in need of the equipment). Note that the lessor acquires the equipment outright from the manufacturer.
As the lessee, they are allowed to use the equipment for a period of time, provided they maintain and hold up their own end of the bargain and make the agreed-upon monthly payments on time. Depending on the type of lease agreement, once the lease is up, they can choose to surrender it back to the lessor or may access other options like buying the equipment.
Every lease is different, but there are some companies who are quite willing to offer two- to five-year leases with interest rates in the 8.5 percent to 20 percent range. Note that the exact rate and terms will vary depending upon the lessee credit, the type of equipment they are seeking to lease, and even the industry standards. Lessees are expected to have a decent personal credit score to qualify for the most attractive rates and terms.
Since specialized business equipment is such a crucial necessity for many businesses, a lot of companies are willing to provide leasing options to businesses. In fact, the world of equipment leasing is growing exponentially and is quite competitive too.
How Much Do Equipment Leasing Companies Make Yearly and What is Their Profit Margin?
Annual revenue of equipment leasing companies is generally estimated to be between $30,000 and $5,000,000 yearly. Their interest rates are solid too, varying between 5.5% and 9.5%. The businesses in this industry can be allowed to borrow anywhere between $5,000 and $500,000. Leases typically span anywhere from 24 months to 72 months.
Factors that Determine the Profitability of Equipment Leasing Companies
In the equipment leasing business, there’s more to consider than just age and condition. If you’ve ever bought or sold heavy equipment, then you understand that there’s a lot at stake. If you are dealing with multimillion-dollar equipment lease, there is a huge financial investment involved, and you want to be sure that you are getting the best value.
Understanding what determines the profitability of an equipment leasing company will give you a better idea of the industry, which will make your journey easier, and give you more confidence. Here are some of the main factors that determine equipment leasing profitability:
Supply and Demand
Just like with other products and services in any other market, the laws of supply and demand affect profitability. Have it in mind that as demand goes up or supply goes down, rates rise as businesses compete for available machines. Therefore, if the market is saturated with a particular type of equipment, it creates a demand that favors an equipment leasing business more.
Market Conditions and Economic Climate
Economic and market conditions have the biggest influence on supply and demand, and therefore on the rate of business equipment. Note that when the economy is in a downturn, everyone watches their bottom line very closely. They’re usually less willing to pay higher rates for equipment, or won’t be afraid of lengthy negotiations to get a rate they want.
However, market conditions aren’t always entirely dictated by the economy. Different industries go through cycles or can be seasonal, like forestry. During the peak logging season, equipment will be needed quickly, is in greater demand, and will therefore be worth more.
Howbeit, these factors are out of the control of the lessor and lessee, but there are ways to lessen the impact. When demand is high in one industry or part of the world, it is often low elsewhere. Tapping into those regions or industries of high supply or demand can be a smart move.
What year is it? How old is it? Those are probably the first, and most common questions people will ask about any equipment. And yes, age is an important factor in determining the rate and potential profitability. Equipment depreciates as it ages – it has seen a lot of use, is showing signs of wear and tear and needs more repair and maintenance, or it may be simply outdated with the emergence of newer, more efficient technology.
Note that two identical pieces of equipment of the same age can vary widely in rate. They might both be old, but one that is well-maintained or has low hours can be worth considerably more.
If a piece of equipment is expected to perform a job well, then the condition should be one of the most important aspects when it comes to determining the rate. A piece of equipment, regardless of age, won’t attract a good rate if it is in poor condition overall. But an older equipment that’s been well-maintained or lightly used can still sell for a respectable amount.
And appearance can make a big difference too. Note that having the equipment painted, repaired, or even just cleaned often results in a higher rate. And if more detailed information such as maintenance & repair records, history, and proof of ownership can be shown, then lessees will have more confidence and are generally willing to pay more.
There are lots of equipment manufacturers out there, but just a few dominate the market. Also note that people prefer to buy particular makes of equipment, and that brand loyalty is reflected in the sale of equipment around the world.
People are usually willing to pay more for a name-brand they’ve either had good results with it and trust it, have a good relationship and history with the dealer or manufacturer, or the name itself often simply implies a certain level of quality.
Having access to detailed information about the equipment and being able to compare models side-by-side better helps lessees determine its value.
Model and Features
Standard models fluctuate less in rate and are easier to rent or sell than specialized pieces of equipment. And more potential uses mean more potential lessees. If you have a specialized item to sell, it is necessary to market your equipment to the biggest audience possible.
Features and attachments can have a significant effect on the leasing rate of equipment—either positive or negative. An attachment or feature that appeals to one lessee may deter another lessee – so if you are leasing, it is imperative to reach a large pool of potential lessees.
Rates and Terms
Although you won’t pay interest on an equipment lease in the same way as you would on a traditional loan, leasing companies typically calculate interest automatically into your monthly payments—and therefore, leasing is often considered more expensive in comparison to equipment financing in the long run.
As you can see, equipment leasing companies can make money in a number of ways. You can expect to see rates on equipment leasing to range around 5 percent to 35 percent. However, on top of the normal monthly payments, some also charge additional costs for insurance payments, maintenance, and repairs, as well as other fees associated with the leasing process. Normally, terms or repayment periods will vary, but tend to range from one to six years.