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Don't overlook these aspects of an equipment lease agreement

For many small- and medium-sized businesses, buying equipment outright may not make sense, whether due to financial concerns, shifting long-term needs, or worries about the technology quickly becoming obsolete. In these cases, the businesses often opt to lease the equipment.

Companies that choose to finance equipment are increasingly doing so through leasing. From 2012 to 2016, the use of a lease as the equipment financing method increased from 17% to 39%, according to one industry group’s study. It’s not a commitment you want to make without doing your homework, however. Here are some aspects of an equipment lease agreement you may want to scrutinize before agreeing to anything.

Repairs and maintenance

All strong leases should clarify who between the lessee and lessor is responsible for repair and maintenance. That includes not just which party pays for such work, but who is responsible for initiating it, and whether any type of existing insurance might apply. You may also want to try to clarify what qualifies as regular wear and tear.

Ownership options

Oftentimes at the end of a lease, a lessee will have the ability to purchase the equipment outright. If that’s of interest to you, it’s important to negotiate a fair price while accounting for all possible factors that may affect the equipment’s value. A lessee might also want to try to include an early buyout option, allowing them to take ownership of the equipment before the lease ends – but these options often come with a high cost.

Modifying or moving the equipment

Can you, as the lessee, bring this equipment to a new location if you move your business? Or, if you want to modify the equipment somehow – maybe adding an additional component – does the lease allow for it? And under what terms, if any? It’s important to build the level of flexibility you may need into the lease agreement contract, taking into account these types of forward-looking possibilities.

Should you pursue an operating lease or a capital lease?

Broadly speaking there are two types of leases. An operating lease, the Small Business Administration explains, is akin to a rental, where the lessee doesn’t assume certain risks or tax obligations. A capital lease is similar to a loan, with the lessee in effect owning the asset, as well as its risks and obligations. An attorney may be able to help determine which option makes the most sense for your particular situation.

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