Upgraded machinery and equipment add fuel to the performance of businesses. Investing in technologically advanced equipment is the mainstay of business growth and allows continuous improvement in productivity and efficiency.
However, such equipment investments are a costly affair for small businesses. Besides, the pandemic has also impeded the revenue-generating capacity of the companies depleting the already limited capital reserves.
To cope with the current situation and to stay competitive, businesses could explore leasing alternatives. Equipment leasing is wherein an enterprise can use the equipment for a specified period in exchange for lease rentals. Through leasing, companies can defer their upfront investment while reaping returns from using the equipment backed with the latest technology in their operations.
But business owners must be clear on the end-of-lease options after the lease tenure to safeguard the business and its operations. Here are the possible terms at the end of the lease tenure:
Return the Equipment.
Under this option, the lessee is obliged to return the equipment at the end of the lease period in an appropriate condition. In non-core assets like laptops or automobiles, such end-of-lease terms make sense as the business can return the old, and in some cases, outdated equipment effortlessly.
However, it is crucial to keep the equipment in good condition to ensure the return is accepted. Ordinary wear and tear can turn out to be expensive and result in high penalties. So, returning the equipment should be chosen only when the regular upkeep can be taken care of by the businesses.
Renew the lease agreement.
A renewal option in an agreement outlines the terms for renewing or extending the original arrangement. This clause is beneficial for businesses that do not yet have the capital to invest in purchasing the asset but would like to continue using the equipment.
However, on every renewal, the lessee will get subjected to a credit check to revisit the lessee’s financial position to honor the contractual terms.
At Tata Capital, we offer a variety of leasing structures tailored to suit unique business needs. Reach out to our experts to get an appropriate leasing solution for your equipment purchases
The Fair market value option provides the lessee a right to purchase the leased asset at the then-determined fair market value price. This option allows the lessee to invest in core equipment without worrying about the upfront investment while allowing an opportunity to purchase at the end of the tenure. This type of end-of-lease option is preferred by businesses leasing core manufacturing equipment vital to business operations.
Sale and Leaseback Option.
It is an arrangement whereby the business owner sells an asset and leases it back from the purchaser. This way, it enables the businesses to raise capital while holding assets to operate their business.
The sale and leaseback transactions are incurred predominantly for the high-cost fixed assets such as large and expensive manufacturing equipment or earthmovers and excavators.
It is beneficial for the lessee/seller as it enables them to get a tax deduction of lease rentals, expand the business, infuse cash, and reduce the volatility risk of owning the asset.
Termination of the lease agreement.
It is pretty common for small businesses to lease and use the latest equipment subject to technological changes for a short time. The lessor owns the asset and bears the risk of obsolescence. The lessee pays monthly lease rentals and claims the deduction of the same from the overall taxable income and has the flexibility to terminate the lease agreement when it is no longer required.
Such termination before the end of the agreement might attract foreclosure charges which the lessee must pay in the event of early termination. Such amounts are mentioned before entering into the arrangement. This transparency can help businesses plan their financing accordingly if they foresee a possibility of early termination.
Equipment Leasing is an efficient tool for business owners looking to expand without hampering the capital reserves. It is essential to understand the end of lease options before going ahead with the lease agreement, as it has long-term implications on the business.
Being one of the frontrunners in offering leasing in India, Tata Capital’s leasing team can guide you in choosing the most suitable leasing solution for your business. Reach out to us to know more about your end-of-lease options.
09 August 2021
4 mins read
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