Lease companies have very streamlined appication processes that are designed to require very basic information for smaller ticket deals, with information requirements increasing with lease request complexity. As an example, for amounts requested under $25,000, the application can be completed in just a few minutes and an approval received in as little as an hour via electronic scoring systems specifically designed for speed. With higher value requests, more information will be required with approvals being issued in one to 3 business days in most cases. Compared to an equipment loan process that tends to require the same amount of information and time process an application, the leasing process is noticeably faster.
One of the reasons for the faster process is due to the demand by customer to have a faster process in order to take advantage of opportunities to purchase equipment when items come available and to reduce business down time when replacements are required. Another reason lies in the fact that the leasing company ends up owning the underlying security and they will also only focus on equipment they feel comfortable liquidating, allowing for a quicker assessment of any financing request.
Cash tends to be a precious commodity in any business, and the ability to create a higher level of financial leverage at reasonable costs is important to manage cash flow and acquire the necessary assets to run the business. For equipment leasing, leverage or the percentage of the asset value that can be financed, is as high as 100% in most cases. In cases where delivery, installation, and training costs are involved with the asset purchase, these related soft costs can be financed by the lease as well, effectively providing greater than 100% financing.
And by being able to access lease financing, a business can keep their line of credit and cash supply available for working capital and other requirements.
An approved equipment lease will be repaid through an amortized payment schedule that remains fixed during the entire lease period. The lease term can also be matched to the timing of the real depreciation of the equipment so that you’re only paying for the value being consumed versus paying for equity in the equipment that can’t be expensed until much later into the future. As a result, the lessee can more accurately manage cash flow and project future cash flow requirements including when asset replacements or upgrades will need to be made.
When you purchase an asset for cash, you are required to pay all the point of sale taxes at that time. With equipment leasing, the lease company is the one purchasing the asset, so they pay the taxes at the point of sale and the lessee only pays taxes on each lease payment as they come due. This creates a deferment of taxes which reduces the amount of cash outlay that is required at time of purchase.
Operating leases and capital leases have different accounting both for the business financial statement and income tax planning. Based on the nature of the business, there can be advantages to considering different types of leasing programs to get the most tax and accounting benefits. For instance, a capital lease is treated more like an equipment loan for accounting and taxation purposes, while an operating lease can allow for 100% of the lease payment to be classified as an operating expense.