Most companies would prefer to have their own equipment at their disposal 24/7. However, this is not always possible due to various factors. There are a few disadvantages when it comes to renting equipment.
To avoid and reduce rental equipment problems, it’s important to have high quality, clean, and well cared for equipment. This will set you aside from competitors and add authenticity to work being done. Therefore, staff should be trained to manage the rented equipment effectively. A daily checklist should also be available to make staff accountable for completing the required maintenance checks.
Higher Overall Costs
Leasing items is always more expensive than purchasing the items. Higher costs are paid on leased products over time. Most rental options require interest rates to be paid as well. Lease payments are treated as expenses. This is because you own no rights to the rented equipment. Money has to be kept aside for regular payments to the owner of the equipment. These payments are treated as expenses rather than payments to an asset.
Zero Claim on Capital Allowances
You cannot claim capital allowances on leased assets, if the rental period is less than 5 years, and in some cases less than 7 years. As a result, a deposit may be required or some payments made in advance. Long-term lease agreements remain a burden to businesses. Agreements are locked, and expenses for the lease duration are fixed. After a period of time lease payments become a burden to most companies.
No Ownership Rights
When one rents equipment, they have no ownership rights to rented equipment. At the end of any leasing period, you will not end up being the owner of the leased equipment. This will be after heavy financial drain used to keep the equipment for use. Though a considerable amount of money was used on the equipment, you will never have any rights on the equipment. Since you don’t own the equipment, you have no equity rights on the asset.
Complex Leasing Agreements
Leasing arrangements can be more complex to manage than buying the equipment upfront. Companies have to be VAT registered to be able to take out leasing agreements. When an asset has been leased, it can only be bought at the end of the agreement.
Reduced Return for Equity Holders
Lease expenses reduce the net income without any appreciation in value. This means that equity shareholders face limited returns or reduced returns, at the end of financial years. In such cases, the primary objective in business in most companies related to wealth maximization may not be achieved.
Penalties for Early Returns
Most lease contracts offered in the market are for extended periods of time. You may end up renting a piece of equipment for a longer period than you need. If rental equipment is returned before the stipulated return time, a business may still be in charge of insurance, personal property tax, and damage fees. This can prove to be more expensive than buying or leasing.
Most lease contracts do not appear on balance sheet of a company. However, investors will still consider leases as debt and adjust their valuation of the business by including leases. Debt also causes limited access to other loans. It might get difficult for a business to access capital markets and acquire loans in other means of debt in companies.
When a company decides to rent equipment, they should be prepared to deal with maintenance costs. Once a piece of equipment has been handed over to your company, you are fully responsible for maintenance costs. Your company will be responsible for proper operation of the asset leased to you. Failure to do so may lead to fines paid due to poor maintenance of the asset given to you. Maintenance is often up to the leasing company’s specification.
Written by Lindsey Rentals. Lindsey Rentals offers the best equipment rentals in Columbia, MO.