$1 purchase option. Fair market value. 10% buyout. What?!
If these terms sound foreign to you, then you've got a thing or two to learn about equipment leasing. Especially if you're a business owner.
First, let's define the lease itself. Leases come in a variety of forms.
Many people think of leasing in reference to property. For example, signing a lease on an apartment or on a commercial space.
When you sign a lease, you agree to use an asset that belongs to another person or entity. You lease an apartment that belongs to someone else and live in it until the terms of the lease are over.
At the end of the lease, the owner expects that you renew the lease or vacate the property.
The same is true for equipment leasing.
Equipment Lease Example
You've started a printing business and you need a copier. Since you're new to the business, you don't have the money to buy the copier outright. So you decide to lease the machine for 12 months.
When the lease is up, you'll have the option to continue leasing the copier or return it to the copier company.
How does that benefit you as the business owner?
First, you get a top-of-the-line copier with very little capital. An equipment lease usually requires no down payment. If you were to finance using a traditional loan, you might need to put 10% down or more.
Second, copiers are like computers in that technology moves fast. To stay up-to-date with the copying trends, you'll want to upgrade often. The lease option allows you to return the copier and get a newer one at the end of 12 months.
Finally, the lease might give you tax benefits that a purchase wouldn't. We'll go over this in more detail later in this article.