Are you considering financing a new forklift and need to decide on the benefits of leasing vs. purchase? There is no perfect answer which suits all applications and companies. Depending on your cash flow, capital requirements, equipment condition and usage, there can be benefits to either side of the equation.
One of the primary decisions is that of ownership. At first glance, the answer might be “of course we would like to own the equipment”. For a business that has light forklift use and expects a longer equipment life, this makes perfect sense. For a heavy use application an operational lease may be a better solution. There are many considerations and the information below will help provide some insight.
FINANCE CONTRACT TYPES:
Leases fall into several categories including Operating leases (Fair Market Value Lease) or a Finance leases (Dollar Buyout or Capital). Leases do not necessarily provide a purchase option so be sure to clarify this point if ownership is desired. In a purchase situation (fully paid out contract) the equipment would be listed as an asset and the depreciation taken accordingly. Conversely, a lease is typically treated as an operating expense.
Working capital and cash flow are concerns for many businesses, especially start-up companies. One of the key benefits to an Operating Lease is that it is an off balance sheet transaction, and is considered an operational expense. Lease payments can usually be deducted as business expenses on the tax returns, reducing the net cost of the lease. Operating lease payments are generally lower than fully paid out finance contracts where ownership is transferred after the last payment is made. Businesses can benefit from a lease by conserving capital for inventory expansion, product development, and other more profitable uses of cash, rather than investing in forklift equipment which will depreciate over time.
Maintenance costs and trade in/resale value should be considered. Maintenance programs can also be included as part of a finance contract, keeping forklifts in top condition and reducing down time. Market values for equipment will fluctuate depending on economic conditions, equipment brand, specifications, maintenance history, and condition. This can be a downside of ownership. Technological advancements on new equipment may also render older equipment less desirable thus reducing value. Once tnt hahe final operating lease paymes been made, equipment disposal is the responsibility of the finance company.
Forklift leases can be adjusted based on the number of hours accumulated, ie., 700, 1200, 2000. The lower the hours, the lower the payment, so the leasee only pays for the use of the forklift. It is also important to note that the charge for over-time hours can be substantial so it is prudent to understand these fees before a contract is signed. Finance contracts can provide flexible payment terms including contracts from 12-72 months and can be set up with seasonal structure to help cash flow during the slower seasons. This is referred to as a “Flex Lease”. Split terms are also available which provide an optional lease extension. As an example, a 36 month Lease with a 24 month extension will provide an option to return the equipment at the 36th month or 60th month. Payments are generally lower in the second part of this contract.
A FEW FINAL NOTES:
It is best to consult a CPA before making a final decision. Request a sample lease document in advance of making a finance decision and be sure to review the terms and conditions before signing. Pay attention to equipment return condition requirements. Forklifts that do not meet required lease conditions can be subject to repair fees which can add up quickly. We hope this information has been helpful in understanding the different finance options.
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