At the beginning of the journey of building your business, purchasing the equipment to compete within your market may not be an option, primarily because of funding. And that is where an equipment lease comes to the table.
Equipment leasing is an arrangement where a person known as the lessor gives temporary possession of equipment to another person or body known as the lessee for an agreed period of time and under agreed terms and conditions.
An equipment lease agreement is therefore a contractual agreement between a lessor and lessee to use equipment for a specified period in exchange for periodic lease payments.
The Equipment Leasing Act, 2015 (ELA) is the extant law regulating equipment leasing in Nigeria, and it has defined equipment as any movable or immovable equipment however described. This may include motor vehicle or bikes, aircraft, ships, plants and machinery, and office equipment like computer, air-conditioning units, etc.
Types of Equipment Leases: The two most common types of lease are:
- Financial (or Capital) Leases: These are long-term and non-cancellable before expiration of the lease period. They are usually used by businesses that intend to use expensive equipment over a long period of time. Here, the lessee is usually responsible for maintaining and insuring the equipment as well as paying taxes associated with the equipment. For this type of lease, the lessor gives the lessee the option to purchase the equipment at the end of the lease term. This type of lease is best for business owners who are renting expensive equipment that they may not have the funds to purchase immediately.
- Operating Leases: these are short-term leases cancellable before the expiration of the lease period, where the lessor usually bears all the risks in the agreement, such as maintenance, insurance, repairs, etc. This is best for businesses in need of equipment for a short period of time.
Terms of Equipment Leases include:
- Lease Duration.
- Compensation: lease payments to be made, timelines on payments, etc.
- Renewal Options: The renewal options provide guidelines on the renewal process at the expiration of the lease agreement.
- Cancellation Provision.
- Market value of the equipment.
- Tax and insurance responsibility, where applicable.
- Remedies for breach of agreement, etc.
One key benefit of equipment leasing is that it serves as a convenient source of business financing or capital acquisition without breaking the bank. Business owners who are unable to outrightly purchase equipment they need may opt for an equipment lease instead, where they get to use needed equipment without having to purchase it and save funds while at it.
Equipment leasing should thus provide lessees with full financing and flexible payment schedules. For the lessor, equipment leasing is an alternative to borrowing money, seeing as it yields a higher return on investment than lending out money. Also, the lessor retains ownership rights to the equipment, so if the lessee defaults on any of the agreed terms, the lessor has the right to repossess the equipment.
Another benefit of equipment leasing is that it guides against obsolescence. In a rapidly evolving technological market, using short-term equipment leases allows businesses to replace or exchange old and outdated equipment for new and improved ones.
Should you need advice on equipment leasing, contact us here.