January 23, 2019 by Reece Tomlinson
For many business owners, the day to day grind is always on their mind. They work-hard on the things that bring them money to pay the bills and worry about the minutia when it can no longer be pushed back. For this reason, we see many business leaders who are unsure of what they will do once their leased agreements ends. Without a plan of action, they typically end up being led by sales people who may not have the best interest of their business in mind.
The goal of this article will be to give a little insight on the options available at the end of a lease in the hopes of balancing the playing field. At the end of every lease, there are typically four options available to choose from. Business leaders can choose to complete the lease, extend the lease, renew the lease or start a new lease.
The first question that should always be asked when a lease is coming to its end is whether the leased assets is still required for optimal business operations and if so, is the company prepared to pay out any residual amounts required to own the asset at the end of the lease period. This question can involve a lot of critical thinking and if answered truthfully, may lead to an entire product line being discontinued. The reason for this is if the asset was not generating income for the business during the period of the lease and was needed for a specific product or service, such as an asset for a specific construction project, why continue to throw money away? For some businesses, there may be a strategic reason to keep a product line or service. If there is no strategic reason and the asset was not generating income, then the asset should be returned, and the lease ended. Doing so will free up cash flow and allow for better investments in the future.
In many lease agreements, there is an option to extend the lease. Extending is quite different from renewing as extending is simply keeping the same lease agreement in place. This means that the lease can continue to be accounted for just like it was previously, but will allow an extra, pre-determined, amount of time with the asset. Extending a lease is an excellent choice if the asset is required for just a little longer to complete a specific job or the asset has a limited lifespan. It can also be a good option when deciding whether or not such a type of asset will start or continue to generate income.
Renewing a lease, as stated above, is different from extending a lease as it involves leasing the same asset under what is seen as a new agreement. As it is a new agreement, it is important as a business leader to ensure that the agreement matches the circumstances of the organization. The asset will be older at this point, which means it may require more maintenance or repairs even if it worked with no issues up until this point. It is generally a good idea to keep this in mind when thinking of renewing a lease to be able to probably plan for it.
A benefit of renewing or extending a lease is that if there is a learning curve with the type of asset being acquired, there will be no need to retrain employees. It is also typically cheaper and can help free up cash flow, while continuing to have the asset needed to generate income.
Finally, the last option is to simply return the original leased asset and get a brand new one. This option will typically be more expensive but allows businesses to have the best technology available. If the technology has advanced significantly, the new asset should be able to generate even more income with less resources. Depending on the circumstances, it may involve re-training employees, but it should also limit downtime due to maintenance ad repairs.
Ultimately, the best decision for any business depends on the circumstances. Whether it is in the construction industry, the health industry, etc. it is important for business leaders to have an idea of the options available so they can make an informed decision.