Equipment, for most lease funders covers what most people normally associate with equipment, such as construction vehicles, copiers and other mechanical items. Most business owners don't realize that leasing funders also consider many other assets eligible for leasing.
Some of the areas that most people do not realize they could lease rather than purchae is in the computer sooftware industry, the furniture industry, green energy industry (LED lighting, solar panels, etc.), just to name a few. A business can lease almost anything that is necessary for the operation of their business or that they can show the cash flow to cover on a monthly basis.
Although it is true that the better the business owner's credit is, the better the rates will be, it is very common for owner's with marginal or bad credit to still be able lease assets instead of haing to purchase them for cash or get loans to cover the costs. When it comes to acquiring any asset for your business that will generate cash flow, you must look at the amount of revenue you will generate compared to what you monthly payment for that asset is. It is absolutely critical not to get hung up on the rate that you may have pay on a lease as it could cost you a lot of revenue in the long run. An example that we saw recently was an onwer of a business that had credit problems and needed equipment to increase their construction business. They were very upset with a rate on the lease of just over 20% due to their significant credit problems. We pointed out that the asset would generate over $10,000 per month, according to their own estimates, and that the cost was going to be just under $4,000 per month over the three years of the lease. Although they were not happy about the rate, they quickly saw that the net result, even with terrible credit, was that they would still net a positive $6,000 per month and they moved forward rapisly to take advantage of that positive cash flow.
The above example does not take into account the many advantages of leasing over purchasing. The single largest advantage to all business owners is that you do not have to drain your corporate bank account to acquire the asset. This is very important since most businesses need to have cash on hand and never know when something will arise that requires cash.
The next advantage of leasing over purchasing arises when a business does not have the cash to make the purchase and is obtaining a loan to purchase the asset. It is always easier to obtain a lease than it is to qualify for a loan. Loans usually require more documentation and time as well as other items discussed below. Lease approvals take less time since it is really more about the "equipment" and not about the owner's credit as a sole deciding factor.
Most businesses are able to obtain significant tax advantages when leasing assets over their purchase. Most asset that are purchased must be depreciated over long periods while a leased assets is almost always eligible for a complete write off during the lease period. Leasing is generall shorter than the useful life of an asset under the standards set forth by the IRS.
Most banks require 20-30% down-payments be made by the purchaser of "equipment."
Many banks do not provide fixed interest rate loans for assets purchases. This can be frustrating as a business owner's payments may change numerous times during the loan to account for adjusting interest rates. When you lease an asset, the rate and monthly payment do not change since leases are fixed rate transactions. Is it also unusual to see any type of pre-payment penalty on a lease where banks do incorporate early payment penalties into their loans.
If your bank will even consider making a loan to you for the acquisition of equipment, it will not likely be for more than 3 years. Depending on your credit and the equipment in question, you could arrange for a lease for up to 5 or even 7 years if necessary. Obviously, having a longer time frame would allow a business to have lower monthly payments even though they may pay more over the life of the term. It is also likely that owners with good credit can obtain better interest rates on leases then they can on a bank loan. We have seen rate for owners with 700+ credit scores down at 5% and even lower, which most banks can't come close to on this type of loan.
When a business leases an asset it is actually expanding the available credit for the business since a lease is not depleting any existing line of credit the business has with a bank or other lender. This is extremely important when the business owner has other things they need capital and lines of credit for in their business. If you have a line of credit with your bank and they are willing to make a loan to you to purchase equipment, it will likely reduce your existing line of credit since the bank only want to have a certain dollar exposure on any customer. The lease funder does not function this way and has none of these issues.
Therefore, before your business purchases anything, think about the possibility of leasing and how many of the advantages we discussed would apply. If you can't make any of the advantages we listed work for you then you should purchase the asset.
If you are not sure if you are able to lease a particular asset, if you could afford the monthly payment or you just want to get more information on leasing, contact us for a free consultation. We want to help you understand what will ultimately be the best thing for your business. We wish you most success for your business and want to see you as profitable as possible.
You can reach our office at (561) 450-7850 or firstname.lastname@example.org