With the right kind of equipment, a manager with vision, and a crew that works hard, you can grow your business and build an empire. You just might start your empire in the best way possible – by leasing.
Leases provide advantages that help businesses make fast progress while managing costs. Before you decide on the route of ownership or leasing, it helps to know why leasing will work best if you start growing your company right now.
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What is Equipment Lease Financing?
Equipment lease financing involves leasing business equipment from a third party. Capital leases are the most common type of equipment lease, and in this arrangement, the lessor (service provider) agrees to transfer ownership of the equipment to the lessee (your business) at the end of the lease’s term.
Equipment lease financing benefits both parties by allowing the lessee to use new equipment without having to pay for it in full up front. This helps them minimize upfront costs and free up working capital for other uses.
The lessor can profit from leasing out their equipment by charging lessees a monthly fee.
How Does Equipment Financing Work?
Businesses that lease equipment benefit from predictable, fixed monthly payments, with the option to purchase the equipment at the end of the lease term. Leasing can be more cost-effective than going into debt for a large purchase, especially if you have limited operating capital. This is especially true for seasonal businesses and startups.
For restaurants, for example, leasing a commercial ice machine rather than buying one outright can be more affordable and efficient.
When you finance equipment through a bank or lender, you get an asset that depreciates in value over time. That’s not a problem if you plan to operate your business indefinitely — but what happens when you decide to sell?
A buyer might want to negotiate a price lower than what you owe on the loan. This is one of the many advantages of leasing: When your lease term ends, you have the option to buy or return your equipment without worrying about its resale value.
How Equipment Leasing Supports Business Growth
When your business is running low on cash and you need to buy new equipment, you have two choices: lease or buy. While leasing isn’t right for every business, Let’s look at the key reasons why it’s the best choice for growing companies.
1. Upgrade your equipment more often
One of the biggest advantages of leasing is that it lets you upgrade your equipment more often. Instead of buying hardware that will be out-of-date in just a couple years, leasing allows you to upgrade regularly so you always have the latest and greatest technology available.
2. Lower up-front costs
Another benefit of leasing is that there are lower up-front costs. Since leases require less money down than a traditional loan, leasing allows businesses to invest their capital into other areas of their company rather than spending it all on equipment. And because most leases are 100% tax deductible as an operating expense, businesses can save even more money.
3. Pay as you go
Leasing also gives businesses the ability to pay as they go instead of having to pay all at once like they would with a traditional loan. For smaller businesses that can’t afford large lump sum payments, leasing provides an opportunity to match expenses with revenue by paying a monthly fee
4. No Down Payment.
You can get new equipment without having to pay any money down.
Off-Balance Sheet Financing. Because the lease is not reflected on the balance sheet, the debt does not show up as a liability or impact your borrowing capacity, allowing you to retain more working capital within your business.
5. Easier Budgeting.
Fixed monthly payments allow you to budget with certainty and avoid unpredictable expenses that might be caused by purchasing equipment outright, such as maintenance and repair costs.
6. Cash flow.
Cash is king in business, but it can be hard to come by. If you have a high-performing sales team, or are in an industry where demand for your products or services is strong, then you may be producing more than enough revenue to fund your day-to-day operations.
However, if you’re spending all that cash on equipment purchases, you might not have enough left over to sustain growth and handle any sudden fluctuations in demand. Leasing frees up your cash so that it’s available when and where you need it most.
Another point to consider is that leasing does not entail the client paying sales tax. The lender purchases the equipment, so he is responsible for paying for them. The customer only pays taxes on his monthly payments.
7. Tax advantages.
Leasing qualifies as an operating expense that can usually be deducted from taxable income dollar for dollar for tax purposes. Because leasing used equipment is treated as a rent expense rather than a purchase, it also enables businesses to avoid depreciation schedules that may limit their ability to write off the cost of assets.
8. Greater ROI
Leasing also lets you tailor lease terms to your budget and operational needs so that payments are manageable and provide a better return on investment.
9. Get the equipment you need now without dipping into cash reserves
Leasing and other financing options allow you to get the equipment you need now without dipping into cash reserves or taking out a loan.
5 Steps to Lease Small Business Equipment
Follow this guide when looking to lease equipment:
- The first step in equipment leasing is to identify the equipment (or vehicles) your business needs. You can then narrow down your search by creating a checklist of what you need and focusing on relevant lease providers.
- The next step is to assess your financial situation and see if you are eligible to lease. Most providers require a minimum credit score of 550 and a minimum annual revenue of $50,000.
- Next, decide on the length of your lease term and how much you can afford to pay in monthly payments. Remember, the shorter your lease term, the higher your monthly payments will be.
- When you’re ready, submit an application for pre-approval with one or more leasing companies. They will contact you within 24 hours to discuss what type of equipment you’re looking for and get an idea of how much money you want to spend per month.
- Once approved, find the equipment and submit an application through a brokerage firm or leasing company.
If you qualify, the company will contact you with more details about the lease terms and what other documents they need from your business before they can finalize everything.
Final Thoughts
Equipment leasing can be a good solution for businesses that need equipment but don’t have the cash on hand to purchase it outright. Buying equipment instead of leasing it means spending a lot of money at once, which can put a strain on cash flow. With leasing, instead of making one large upfront payment, you make smaller monthly payments over time.
This makes more sense for some businesses than others — if your business is seasonal or has slow months, making smaller monthly payments can help smooth out cash flow peaks and valleys.