comparing lease or purchase options

Should You Lease or Purchase Your Holiday Light Show?

If you’ve downloaded our Business Plan for Holiday Light Shows template, you’ve likely noticed that your highest expense would be for purchasing the display. While costs vary, we’ve plugged a placeholder into our template for $660,000, the approximate cost of purchasing an average commercial display. For some, the purchasing cost is a formidable figure. As an alternative to purchasing, many companies today are opting to lease their displays. Should you lease or purchase your holiday light show? Here’s how to decide.

Because of the high costs of owning and operating displays, many organizations opt to lease. Leasing offers advantages that owning does not, including lower monthly payments typically spread over months or years rather than delivered in a lump sum. Leasing spreads display costs over a set amount of time; typically three, seven, or 10 years. Interest and fees are built into these payments, making costs predictable and affordable. For these reasons, organizations who are short on cash or those launching their first commercial light show may find leasing beneficial. 

At the end of the lease, organizations may choose to return or purchase their display. Post-lease buyout costs are reduced, as they factor in depreciation along with payments made throughout the leasing period.

What is display leasing?

Display leasing is a type of financing in which you rent your holiday light show rather than purchase it outright. Similar to a lease on an automobile or computer for your business, the display is leased for a specific period. Once the contract is up, you may return the equipment, renew your lease, or purchase your display.

Display leasing is different from display financing. When you finance a display, you take out a business loan and pay off your display over a fixed term. The equipment serves as collateral when financing a display. Once the loan is paid off, you own the display equipment. 

In contrast, the display equipment isn’t yours to keep once your leasing term is over. As with a business loan, you pay interest and fees when leasing your display, and they’re usually added into the monthly payment. Additionally, there may be fees included for insurance, maintenance, and repairs.

In the long-term, leasing may be considerably more expensive than purchasing a display outright; but for cash-strapped small business owners, leasing provides a means to quickly acquire necessary equipment.

How does a light show lease work?

If you decide to lease your display rather than purchase it upfront, you enter into a lease agreement with the vendor. In this case, the display owner drafts an agreement that details the length of the lease and your monthly costs. 

When leasing, you are agreeing to use the display until the lease expires. Rarely, there may be circumstances that allow you to break your lease. If so, these instances should be clearly spelled out in the contract. Know, however, that many leases cannot be canceled. Once the lease is up, you may often purchase the display at the current market rate or less, depending on the vendor.

The rates you will pay to lease the display will vary by the leasing company and your organization’s credit history. (You will also find this to be true if you pursue a business loan for your display.) Leasing companies tend to specialize in specific industries, so be sure to ask Holiday Outdoor Decor for recommendations of leasing companies we’ve worked with before.

Equipment leasing terms are typically for three, seven, or 10 years, depending on equipment type. Most of our leasing customers tend to favor a middle-of-the-road option, as shorter leases have much higher monthly rates. Conversely, a ten-year lease may limit your ability to provide regular equipment upgrades to the public.

Display leasing is not a loan, which means it won’t show up on your credit report or hurt your ability to borrow. In many cases, the IRS lets you deduct your display lease payments, similar to those you may make on office equipment.

Benefits of display leasing

Buying and maintaining holiday light show displays is expensive. By investing in a display piece, you commit to using it over many years to defray its purchase cost. As new technology is being created all of the time, it is possible that new display developments may cause yours to become inferior or obsolete. Likewise, as commercial displays are inherently exposed to extreme weather conditions, you will incur maintenance costs during your years of use. All of these factors should be considered when deciding whether leasing is the better option.

Leasing your light show display offers many benefits to cash-strapped, small businesses. While not all leases are the same – and there are many ways to finance a lease – here are some basic advantages to leasing equipment: 

  • Leasing makes it cost-effective to get started. Many lessors don’t require a significant down payment.
  • Leasing makes it easier to scale your display. If you need to upgrade to a larger display to delight audiences, you can do so without selling your existing display or shopping for replacements.
  • Display leases are often eligible for tax credits. Depending on the lease, you may be able to deduct your payments as a business expense by taking advantage of Section 179, qualified financing deductions.

How to get started with display leasing

Before you start the display leasing process, answer the following questions. Answering these questions as they relate to your business will help you to make an informed decision on leasing vs. buying your holiday light show.

What is your monthly budget for your holiday light show?

Leasing offers substantially lower monthly payments than purchasing; however, you still need to factor the costs into your monthly cash flow. If you’ve used our holiday light show business plan template, you likely have a comfortable figure in mind. 

How quickly will the display become obsolete?

Technology becomes outdated more quickly in some industries than others. Consider obsolescence as you decide whether buying or leasing makes sense for you.

How long will the display be useful?

Though today’s displays are sturdier than those of the past, it is a fact of life that bulbs burn out, cords get frayed, etc. Your display is going to be what generates your organization’s revenue. It will be critical to keep it in tip-top shape.

Can I really lease a holiday light show display?

The types of equipment that qualify for a lease are practically limitless, however, there are a couple of factors to consider:

Purchase price – It’s uncommon to find a lease agreement for purchases under $3,000, and many large lenders require a minimum purchase of $25,000 to $50,000. As such, most commercial displays will qualify for leases, based on price.

Hard assets – The equipment you lease must be considered a hard asset; anything that could be listed as personal property and not permanently attached to real estate. Soft assets, such as employee training programs and warranties, would not qualify for lease programs, but light displays should.

What are the pros of leasing?

A lease is ideal to finance equipment that routinely needs upgrading – a common occurrence for holiday light shows looking to grow. Leasing gives you the freedom to obtain the latest machinery with a low upfront cost. Plus, with a fixed rate you’ll have monthly payments you can budget.

At the same time, leasing provides a wider range of equipment options for businesses. Leasing makes it financially possible for you to afford equipment that may otherwise be too costly to purchase.

What are the cons of leasing?

Leasing requires that you pay interest, adding to the overall cost of the machinery over time. Sometimes, leasing can be more expensive than purchasing the equipment outright – especially if you choose to purchase the equipment when the lease term has expired.

Additionally, some lenders enforce a certain term length and mandatory service packages. This can add to the overall cost if the lease term extends beyond the length of time the display is needed. In this scenario, you could get stuck with a monthly payment and storage costs associated with unused equipment.

What are the pros of buying your holiday light show display?

When you own a piece of equipment, you can modify it to suit your exact needs. This isn’t always the case with a lease. Similarly, buyers aren’t bound by limitations that an equipment lessor may impose.

Also, purchases may also enable you to resolve any issues more promptly because you don’t have to obtain approval from the leasing company to schedule a repair or order a replacement part. 

Finally, in addition to the depreciation tax benefits available through Section 179, you may be able to recoup some money by reselling the equipment when it is no longer needed.

What are the cons of buying?

Like leasing, purchasing has its drawbacks. The biggest is obsolescence. With a purchase, you’re stuck with outdated machinery until you buy new equipment. Also, market competitiveness and the availability of tax incentives with leasing are often enough to dissuade many business owners from purchasing equipment outright. The costs to maintain and repair machinery, plus a steep purchase price, may put too much of a financial strain on your company.

By some estimates, businesses budget 1% to 3% of sales for maintenance costs; however, this is a rough estimate. The equipment, service hours, its age, quality, and warranty determine actual maintenance costs.

Key takeaway: There are pros and cons of both buying and leasing your holiday light show display; the right option depends upon your business situation and preference.

Display leasing vs. other financing options

A purchase isn’t the only alternative to leasing. In fact, it’s not even the most common alternative. Some of the best business loans can cater to your small business’s equipment needs. In addition, lines of credit and factoring services are also popular ways to finance equipment acquisitions.

Business loans

Similar to a purchase, business loans provide a company with more ownership of the holiday display. With a lease, the lessor holds the title to any equipment and offers you the option to buy it when the lease concludes. A loan enables you to retain the title to any of the items you purchase, securing the purchase against existing assets.

Unfortunately, terms can be a loan’s major drawback. Unlike a lease, which provides fixed-rate financing, a loan or line of credit’s interest rates may fluctuate throughout the loan term. This can make budgeting problematic, depending on the size of the loan. Furthermore, banks and other lenders often require a much larger down payment – up to 20% of the total cost of equipment, according to some estimates.  

The display leasing process: What to expect

You can expect the leasing process to include these steps:

  • You will complete an display lease application. Be sure you have financial data available for your company and its principals. These may be required either upfront or after completing your application.
  • The lessor processes your application and notifies you of the result. This usually happens within 24 to 48 hours of submitting the application. Some lessors may not require financials or a business plan for applications on dollar amounts ranging from $10,000 to $100,000. For financing over $100,000, expect to provide complete financials and a business plan.
  • Once you receive approval, you must review and finalize the lease structure – including monthly payments and the fixed APR. You’ll then sign the documents and resubmit them to the lessor, typically along with the first payment.
  • When the lessor has received and accepted the signed documents and first payment, you are notified that the lease is in effect and that you are free to accept delivery of the equipment and commence any necessary training.
  • Funds will be released within 24 to 48 hours, either directly to you or directly to Holiday Outdoor Decor.

2 equipment lease types: Operating and finance

There are two primary types of equipment leases: operating leases and financial leases. Here’s a breakdown of both.

What is an operating lease?

An operating lease allows a company to use an asset for a specific period of time without ownership. The lease period is usually shorter than the economic life of the equipment. At the end of the lease, the lessor may recoup additional costs through resale.

Unlike an outright purchase or equipment secured through a standard loan, equipment under an operating lease cannot be listed as capital. It’s accounted for as a rental expense. This provides two specific financial advantages:

  • Equipment is not recorded as an asset or liability.
  • Equipment still qualifies for tax incentives.

Dealers’ rates may vary widely, but in general, the average APR for an operating lease is 5% or lower. Average contracts last for 12 to 36 months.

With the prevalence of leasing, accounting regulations set in 2016 by the Financial Accounting Standards Board require companies to reveal their lease obligations to avoid the false impression of financial strength. In fact, all but the shortest-term equipment leases must now be included on balance sheets. While leased holiday displays do not have to be reported as an asset under an operating lease, it’s far from being accountability-free.

What is a finance lease or capital lease? 

Sometimes known as a finance lease or capital lease, this lease structure is similar to an operating lease in that the lessor owns the equipment purchased. It differs in that the lease itself is reported as an asset, increasing your company’s holdings and its liability.

Commonly used by large companies – such as major retailers and airlines – this setup provides a unique advantage, allowing the business to claim both the depreciation tax credit on the equipment along with the interest expense associated with the lease itself. In addition, the company may choose to purchase the equipment at the end of a finance lease.

Given the financial edge this provides, the APR for a finance lease is higher, often double that of an operating lease. Standard interest rates currently hover around 6% to 9%, while average contracts range from 24 to 72 months.

Key takeaway: With an operating lease, while you have access to the equipment for a time, you don’t own it. The lease period tends to be shorter than the life of the equipment. With a finance lease, you own the display at the end of the term. Big companies typically use this type of lease.

Lessee responsibilities

Additional responsibilities can result in expenses above and beyond your monthly lease payment. These typically include the following items.

  • Liability insurance: Average estimates for liability insurance range from $200 to $2,200 annually, with many businesses reporting costs of $1,000 or less.
  • Extraneous costs: Depending on your lease structure, you may be held liable for some maintenance and repairs. Extraneous costs can include any legal fees, fines and certification expenses.
  • Shipping charges: This includes transportation and shipping costs to return the equipment.
  • Added fees: Read your contract carefully. Fees can be added for a one-time documentation fee (which is sometimes as much as $250) or late-payment fees (which run from $25 to 15% of the amount overdue).

Key takeaway: Leases often charge extra fees for insurance, maintenance, repairs, and return of equipment.

Comparing equipment finance providers

Given the various costs and considerations you must consider, it is essential that you compare several lease providers to ensure that you obtain the best rate. Before beginning your search, familiarize yourself with these three types of equipment finance providers, along with their respective benefits:

Lease broker

A lease broker serves as an intermediary between you and any prospective lessors. The broker will present you with offers and submit your requests for financing, handling much of the paperwork for you. 

Brokers represent only a small segment of the leasing market, and their service does not come without costs. Brokers reportedly charge 2% to 4% of the equipment cost to negotiate your deal. 

The benefit of using brokers is realized in their extensive relationships. Often industry-specific, brokers specialize in obtaining a wide range of equipment, sometimes at better prices than might be available through standard channels. 

Leasing company

A leasing company is often the subsidiary leasing arm of a manufacturer or dealer. Also known as a captive lessor, a leasing company’s sole aim is to facilitate leases with its parent company or dealer network. For this reason, you will usually only deal with a leasing company when working directly with a manufacturer.

Independent lessor

An independent lessor encompasses all third-party lease providers. Independent lessors include banks, lease specialists, and diversified financial companies that provide equipment leases directly to your business. They differ from leasing companies in that they typically specialize in display remarketing, a skill that enables them to group products from multiple manufacturers and offer more competitive APRs.

Tips on choosing a holiday light show lessor

The best advice for choosing a quality display lessor is to examine their company with the same level of scrutiny with which they are scrutinizing you! Give preference to those willing to partner with your firm. This may be represented in the level of background and experience they have in relation to your line of business, or  in their willingness to work with you on certain terms. 

Some fees specified under the lessee’s responsibilities – particularly application fees and late fees (at least on the first late payment) – may be covered or waived altogether depending on the lessor.

Also, take time to research some key items about the lessor:

  • Business information: Look into the lessor’s payment history, credit history, business summary, corporate relationships, financial statements and any public filings.
  • Pending litigation: Search public records for any notices of pending litigation.
  • Payment system: Is it simple, or does it require mountains of paperwork?

Ask us! We’ve worked with several lessors successfully and would be happy to point you in the right direction!

Lease-to-own agreements for holiday light shows

If you are interested in keeping your holiday light show display, but don’t have the cash to purchase it or the credit to qualify for a traditional loan, consider a lease-to-own option. Lease-to-own agreements require businesses to make scheduled payments for a specified timeframe before gaining ownership of the equipment.

A lease-to-own agreement has the following primary components: 

  • The lessee enters a display leasing agreement with the option to purchase at the end of the contract.
  • The lessor applies a percentage of each payment to the equipment’s purchase price.
  • At the end of the contract, the lessor pays the remaining balance to gain ownership of the equipment.
  • If the lessee decides not to purchase the equipment, payments made and equipment are forfeited to the lessor.

It’s important to note that if you enter a lease-to-own agreement, your business will likely pay a price above fair market value for the display. On the other hand, once payments are made, your business has complete ownership of the equipment. 

Typically, lease-to-own contracts last the same amount of time as other holiday light show leasing agreements. The main difference with an equipment leasing option is that a percentage of your payments is applied to the display’s purchase price. If a business can’t purchase the display at the end of the contract, the lessee may, in most instances, request an extension, renewal or opt to return the light show display. 

While a lease-to-own situation may be convenient for many small business owners, it doesn’t come without risks. If your company isn’t capable of purchasing the display at the end of the agreement, you forfeit the display and all payments, which can be a major financial loss for a small business. The most important factor in this type of agreement is to consistently communicate with your lessor and ask to renegotiate timeframes if necessary. 

Want to discuss if leasing or purchasing your holiday light show display is right for you? Contact us today. We’re happy to talk about it!

 






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