What size of business should consider business equipment leasing?
Any business at any stage of development should consider business equipment leasing as it is a very cost effective alternative to out-right purchasing. For start-up businesses with little to no revenues, smaller leases, those of $100,000 or less, are easily obtained and are feasible on the personal credit of the owner(s).
Who supplies leasing companies with capital?
Of the billions and billions of dollars that investors pour into the capital markets each month, a good portion finds its way to leasing companies. These leasing companies then use these funds to purchase equipment (business and commercial) on behalf of businesses. As the economy improves and more and more money is flowing into the markets, leasing companies are flush with capital. As a result, they are eager to do business and respond to competition with lower monthly rates.
What is a lease? A lease lets you pass the buck – at least for a while. A lessor (third party funding source) will purchase the equipment that you want and as the lessee, you can use the equipment in exchange for regular payments made over a contracted period of time. The contract can be tailored to your specific needs. But, just like a regular loan, you do need to have a good credit score and be able to prove that you can pay the lender the negotiated payments.
Why Lease Business Equipment? One of the biggest reasons to lease business equipment is that it offers fairly minimal upfront costs and allows you to have flexible payment options and flexible end of lease options. Unlike regular bank loans that may require a substantial down payment, leasing allows you to keep your working capital to focus on other business requirements.
In addition, some companies lease business equipment as a way to protect against obsolescence. When setting up the lease, take some time to evaluate the useful life of the equipment. Choose a term length that will let you upgrade to newer equipment before the old pieces are out-of-date. With end of term lease options, you can opt to buy the equipment at fair market value or lease new equipment.
Leasing can reduce your taxes. Depending on how your lease is structured, you may be able to fully deduct lease payments as a business expense, as opposed to depreciating the value of the equipment as if it were a capital expenditure. Talk to a tax professional to understand the impact this can have on your business.
What can you lease? There are few limits to the type of equipment that can be leased. From everyday business essentials (furniture and phone systems) to industrial equipment (forklifts and conveyor belts) to office technology (copiers and LCD projectors), there is no limit to the equipment that can be leased.
It is also possible to lease the soft costs of purchases. Examples of soft or intangible assets include software, warranties, service, training, installation, and shipping costs. Talk to your lease professional to figure out what’s right for your business. You’ll want to make sure to inquire early on about your lessor’s policies if soft asset financing is important to you.
Types of Equipment Lease Financing
Although lessors may have different names for them, you’ll find that there are basically two types of equipment lease financing: finance and true.
What is a finance lease? Finance leases are also known as capital leases, conditional sales, or dollar buy out leases. These leases are mainly for businesses that wish to keep the leased equipment at the end of the lease. The advantage to the lessor in this case is it gives them the option to purchase the equipment for a small fee, usually $1.00. This works for the lessor because payment terms on finance leases tend to last close to the expected useful life of the equipment and the payments themselves then to be higher.
What is a true lease? True leases, also called tax leases, operating leases, or FMV (fair market value) leases, do not usually span the full expected life of the equipment. At the end of the lease, you can choose to walk away from the equipment or purchase it at fair market value. Payments on true leases are generally lower than payments on finance leases and this is because lessors have the opportunity to resell the equipment when the lease ends. This option works best for lessees that may want to upgrade their equipment by the end of the lease.
Business equipment leasing has become an increasingly popular financing option for Canadian companies that need new equipment.
One of the main benefits of true leases is that you may be able to fully claim all lease payments as tax deductible expenditures. Although finance leases let you spread your payments over time, they are not tax advantaged in the way true leases are. Talk to your tax professional for specific advice on the tax benefits of leasing.
While fixed monthly payments are the norm, they are not your only option. Depending on your company’s financial situation, your equipment lease financing can include one of several payment plans that may be more appealing.
If your company’s cash flow comes and goes with the seasons or weather, you might want to consider what is called a “skip lease”. A lease with this repayment structure allows you to skip payments during slow months without being penalized. They are ideal for recreational and agricultural businesses that rely heavily on certain times of the year for significant portions of their revenue.
Step-up leases provide a solution for companies with limited cash that are depending upon the acquisition of specific equipment to increase revenue. This type of lease recognizes that the company will be able to handle increased lease payments over time, and keeps payments low at first then ramps them up according to a pre-determined schedule.
An alternative to a step-up lease is a 60- or 90- day deferred lease. Just as its name implies, this lease allows you to defer your first payment for 2 or 3 months. Usually you will not have to present a down payment with this option.
Ending your lease
Lease terms range anywhere from 6 to 120 months, although the majority fall between 12 and 60 months.
The lease term that you decide upon will depend heavily on what you decide to do with the equipment at the end of your lease. Usually, you have four choices. You can:
* return the equipment to the lessor with no future obligation.
* renew the lease.
* purchase the equipment for a nominal fee or fixed price agreed upon at the lease inception.
* purchase the equipment at fair market value
Before agreeing to any particular end of lease clause, carefully consider what state the equipment will be in at the end of the lease, and whether you’ll want to obtain a newer model at that time. Also consider the chances that you’ll want to get out of the lease early – if you think it’s likely, be sure that your lease doesn’t contain substantial penalty clauses for early withdrawal.
Equipment Finance Providers
There are three main types of leasing providers: brokers, captive leasing companies, or independent lessors.
Broker – an equipment leasing broker is a lot like an insurance broker, they act as the go-between. The broker will take your lease requests to the banks and financial service companies most likely to agree to finance your asset. They will negotiate for the best interest rate and payment schedule on your behalf. The main advantage of using a broker is the fact that you get to utilize the leasing expertise of the broker and it is the bank or the financial institution that pays the broker’s fee – their fee does not come out of the pocket of the you, the lessee.
Captive leasing company – As a subsidiary leasing arm of a manufacturer or dealer, a captive leasing company’s main purpose is to provide leasing to its parent company and/or dealer networks. Typically you’ll only encounter them when you’re obtaining a lease directly from a dealer.
Independent lessor – Independent lessors are funding sources that lease directly to businesses. These can include banks, equipment lease specialists, and more diversified financial companies.