Equipment Appraisal Blog | Understanding Machinery Appraisals

Equipment leasing has been around for decades however many business owners still do not fully understand the pros and cons of these types of transactions. With many industries growing aggressively since coming out of COVID shutdowns and slowdowns, equipment leasing is a popular way to reduce excess working capital needed to acquire these assets.

So, what else should you be aware of before you sign a new lease agreement? Here are a few thoughts to consider:

I read an article from a major business publication posted earlier this year that claimed a company owns the equipment after the lease expires. This statement is very misleading and essentially untrue on many levels.

First, it depends on the type of lease you enter into. Most lease agreements include a purchase option of some type which must be exercised by the business in order to gain title or ownership. Certain lease contracts have a nominal purchase option, (as low as $1) at expiration however, these have to be treated as loans on your company’s books since there is a requirement that purchase options fairly represent the future value of the equipment to gain the off-balance sheet accounting benefits you would prefer to have.

More typically, purchase options are stated as a fixed percentage of the original purchase price, commonly in the 10-20% range, depending on the lease term, or based on the fair market value of the assets. If the options are not exercised at lease expiration in a timely fashion, the owner (Lessor) can compel you to return the equipment or continue to lease it for an extended period.

Make sure you carefully read the purchase option language before signing and determine if it makes sense based on your present and future plans. Track the lease internally and consider what you need to exercise at least 6 months in advance of expiration. Notify the Lessor as required to keep the original terms in place. It is easy to fall into a situation where you forget to respond as time goes by, and are put in a low-leverage situation with limited, undesirable options left.

An equipment lease is a great way to keep assets off your balance sheet as well as the associated debt which can make your company look highly leveraged. Instead, your business can treat the lease payments as an annual expense that can be written off. Depending on the type of lease you enter into, your accounting factors may vary, so ensure you consult with your tax accountant before finalizing lease terms.

When you're running a business, there are a lot of financial decisions to make on a daily basis. When you need to get equipment, whether as a start up or an established company that's replacing existing equipment or expanding, one of those decisions is whether you are purchasing or leasing the equipment in question. How do you know if you're making a good deal? Here are some tips to consider.

Considering Leasing? Find Out How an Equipment Appraisal Can Help

Lease vs. Buy

First off, let's take a quick look at the advantages and disadvantages of each type of acquisition. When you lease equipment, you're paying to use it for a set period of time. There may be some restrictions in terms of how you can use the equipment, as the leasing company expects to get back a machine with a certain amount of equity at the end of the lease. A lease also prevents you from building equity in the asset as you pay it down, because you're only paying for the privilege of using it. But at the same time, you typically don't have to worry about breakdowns or heavy repair bills, because that's covered under the terms of your lease. The advantage of leasing is that you typically pay a lower price for equipment you may not want to keep in the future, which is very helpful if your business is expanding.

By comparison, buying equipment means that you're responsible for repairs not covered by the warranty, but you're purchasing the equipment. Every payment you make increases the amount of equity you have in that asset. At the end of the payment schedule, you can choose whether you're going to retain that piece of equipment and invest the payment money into another area of your business or if you're going to sell it and have some additional financial assets available for an upgrade or different investment. Your only restrictions on use may be legal limitations of negligence, or intentionally using the equipment in an unsafe manner. Though buying typically has a higher payment, you gain equity and increase your business' assets.

Where Equipment Appraisal Comes Into Play

But how can an equipment appraisal affect your decision? If you're getting ready to enter into a financial agreement of any kind, you'd want to know you're getting your money's worth. In the end, whether you buy or lease, you want to make sure you're paying a fair amount. That means that having an equipment appraisal performed protects your investment. If you're leasing a piece of equipment, a machine appraisal lets you know whether the lease payments are too high. If you're purchasing that same piece of equipment, the machinery valuation helps you negotiate a fair price for the equipment. You wouldn't pay $30,000 for a 2000 Geo Metro with 200,000 miles on it. but it's easier to know the value of a vehicle than it is machinery that has a much more limited market. Having a certified equipment appraiser provide you with a machinery valuation gives you the knowledge you need to negotiate a good price.

By taking a machine appraisal into account when you're acquiring equipment for your company, you can ensure that you're getting a fair deal whether you're buying or leasing.