Need Financing for an Equipment or Business Expense?
We’ve put together this FAQ to help you find the right solutions for your needs.
Heavy Equipment Financing FAQ
- What is Equipment Leasing?
- What Equipment Can be Leased?
- What are the Different Types of Leases?
- Are There Tax Benefits?
- How to Choose the Right Finance Company?
- Getting Financing Quotes
- Why Should You Lease Your Equipment?
- Tips for Business Leasing
- Types of Leasing Companies
- Applying for an Equipment Lease
- Common Payment Options
- What Happens when Leases End?
What is Equipment Leasing?
For companies looking to grow their business by purchasing new equipment, equipment leasing is now a popular option. As many as 8 out of 10 businesses in the USA, according to the Equipment Leasing Association, are now leasing at least one piece of equipment.
When you lease equipment, you use a third-party funding source also known as a lessor to purchase the equipment you need. You are the lessee and you use that equipment in exchange for a regular payment which is made over a contract period. You will need to have good credit just like a bank loan and be able to show the lender that you have the ability to repay them. This equipment leasing FAQ will help you understand why you should set up a lease and what you should look for in an equipment lease.
What Equipment Can be Leased?
There are not a lot of limits to the equipment that you are able to lease. you can lease phone systems, furniture, forklifts, conveyor belt, LCD projectors, copiers, and so on. All of these pieces of equipment can help you run your business more effectively. When you lease equipment, the total purchase can usually be quite expensive because you often need multiple pieces of equipment. There are not a lot of leasing options for purchases that are under $5,000. Many leases are in the tens or even hundreds of thousands of dollars. If the equipment is something physical it is called a hard asset and not a soft asset.
Most business equipment is fairly easy to lease. Getting a lease to cover a soft asset is a difficult endeavor. An example of this would be training, service, warranties, software, shipping cost, and installation. This is because it’s easier to repossess a copier or a computer in the event that payment has defaulted. The company leasing your equipment can get money back from the lease. For a soft asset, you often have to turn to a business loan. You will have to talk to the lessor about its policies in regard to soft assets if you need this type of financing. To find out the types of programs that companies offer there are vendor comparison tools that you can take advantage of online.
What are the Different Types of Leases?
There are basically two main types of equipment lease financing. They are Finance Leases and True Leases or Operating Leases.
These are also called conditional sales, capital leases, or dollar buy out leases. If you intend to keep your equipment Once the lease is over this is the best one for you. The main advantage is that you have the option to purchase your equipment for a nominal fee. The finance lease and payment terms will last close to the expected useful life of that equipment.
A true lease is also called an operating lease, taxis, or fair market value lease or FMV. This type of lease will not usually span the full life of the equipment you are purchasing. Once your lease is over you can purchase the product at fair market value or walk away. Your payment terms on a true lease will be lower than for a finance lease. The lessor has an opportunity to resell the equipment once your lease is over.
Are There Tax Benefits?
A true lease has a major benefit because you may be able to claim the lease for your income tax purposes. The IRS tends to consider a finance lease to be an installment purchase plan. Finance leases let you spread your payments over time but they don’t have the tax advantage that a true lease does. You will need to speak to your tax professional about these types of leases before you sign your contract.
How to Choose the Right Finance Company?
You need to evaluate lessors before you sign up for anything. The company should be able to answer all of your questions and help you understand what you’re going to be getting into. You want a partner that you can work with when you have difficulty. You should find a leasing provider that has a lot of experience. some we’ll have a specialization in a certain industry or a certain type of loan. Do your research into potential lease providers so you can find one that is going to meet your requirements.
Be Sure to Check References
Whenever you work with a new company you often check references so you should do the same thing when you get a lease. You should get references to four or five companies that have worked with the lessor. You should try to get references for businesses that are similar to your industry or the size of your company. You can ask them some of the following questions:
- Were you treated fairly by the lessor?
- Were you able to get a lease for all of your needs?
- Did they give you help with paperwork in the application?
- Did you have any trouble with lease payments? How did your lessor respond to this?
- Would you choose this financing company again?
Getting Financing Quotes
Once you decide on a business equipment leasing you should get some quotes. You should get five or six quotes from various companies to see what the market is going to charge you. It’s a good idea to speak to these lessors and discuss the following:
- How much it will cost for the equipment
- The time frame for the lease
- Whether or not you plan to purchase the equipment once the lease is over
When you are shopping for your quotes make sure you are comparing things correctly and that you’re getting accurate quotes. Payments tend o go up and down depending how good your credit rating is but quotes are usually quite accurate. You should also watch out for a lease that allows the lessor to raise rates if you’re late for just one payment. You should probably go for an annual rate and not a monthly rate.
Why Should You Lease Your Equipment?
A major reason for you to lease business equipment is that you have minimal upfront costs. When you take out a bank loan, you often need a substantial down payment. You often only have to have two advance payments which are required at the beginning of your lease with equipment leasing. You can keep more capital in the bank and have more money for investments into your business when you use equipment leasing.
A company can also use equipment leasing to protect against obsolescence. When you were sitting up your lease you can evaluate the useful life of the equipment. You can then choose a term length and upgrade to newer equipment when things start to get out of date.
You will have a positive impact on your company’s pocketbook when you lease. Your lease may give you the ability to deduct lease payments as a business expense. If you’re buying the equipment as a capital expenditure, the equipment will depreciate in value. You should still talk to your tax professional to understand how a lease is going to impact your individual business because each business is different.
Tips for Business Leasing
Here are some tips to help you save on your lease and to improve your chances of being approved for a business equipment lease:
1. Get a Lower Purchase Price
Most equipment leasing involves straight financing. You want to bring down the purchase price of the equipment that you want to lease so do some negotiation to get a better deal.
2. Get a Lower Rate
How to negotiate to get a lower rate for your business lease payment. For a small ticket lease that is under $100,000, the range is around 10 to 19% which will depend upon factors such as the size of the lease, your creditworthiness, and the area where you live. A large or middle ticket lease will have more competitive rates at around 6 to 8%. A broker will make around 3 to 5% above the rate which is given by an individual funding source.
3. Drop Soft Assets
You should calculate the least with and without soft assets. You may find it more convenient to pay one bill each month but you have the ability to save a lot of money if you cut out soft assets. You might decide upon a business loan to help you finance the soft assets that you might need for a major equipment lease. If you have to lease soft assets work with the business leasing company that has experience handling these assets.
Types of Leasing Companies
There are three major types of equipment finance providers that can help you.
The broker works about the same as an insurance broker does. The broker will be an intermediary. they look at your leasing requirements and send these o financial service companies and banks that would be willing to finance your asset.
Captive Leasing Companies
This is a subsidiary leasing arm of a dealer or a manufacturer. The purpose of a captive leasing company is to provide a lease to the parent company or the dealer networks. If you try to obtain at least directly from the dealer this is usually the only time that you’ll encounter this type of company.
This type of company leases directly to businesses. They might be an equipment lease specialist, a bank, or a diversified financial company.
The type of equipment finance provider that you go for will depend upon your individual situation and what you require. If you have a financial services provider that understands your business and is familiar with you, you might want to start with them. If you know exactly what equipment you intend to buy then you might want to go with a manufacturer’s captive leasing company. If you’re not familiar with the product that you want to lease or with leasing in general then you want to go with a broker. The broker will give you multiple options and help you find equipment financing that meets your individual requirements.
Applying for an Equipment Lease
Before you apply for a lease make sure you shop around for various quotes. Don’t sign anything unless you are sure that you were going to sign with that company. A business leasing application is treated as a credit application. Each time you apply for an application this will show up on your credit report. If you make too many inquiries this can damage the chance that you will get acceptance.
You may find that an equipment lease is harder to obtain than a regular loan. Quite a few equipment leasing companies won’t consider your application until you have around two years of experience. Other companies want to minimum credit score of around 600 or more. Before you submit an application ask the lessor what requirements they have. If you don’t meet these requirements, consider getting a business loan as this might be the better option for you.
Common Payment Options
The type of payment is usually a fixed monthly payment but there are other options. These options are going to depend upon the financial situation of your company. the equipment lease financing may have different payment plans.
flow for your company tends to change with the seasons then you might want to consider a skip lease. When you use this type of repayment structure you can skip a payment during the slow months and you are not penalized. This can be ideal for agriculture or recreational business that makes most of their money during a certain time of year such as the summer.
A step-up lease is a good solution for a company that has limited cash and it’s looking to acquire certain equipment to increase their revenue. This is a type of lease that will recognize that the company can handle increased lease payments over time. The payments are low at first and then go up on a predetermined schedule. One alternative to the step up lease is 60 or 90 days called a deferred lease. This is where you can defer the first payment for two or three months. When you use this option you often don’t have to have a down payment
What Happens when Leases End?
Leases can range in terms from 6 months to 120 months. The majority of leases are usually between 12 to 60 months. The lease term is going to depend upon what you’re going to do with the equipment once the lease is over. There are four major choices that you have:
- You plan to return your equipment to the lessor and have no future obligation with them
- You plan to renew your lease and continue to use the equipment
- You will purchase the equipment and pay a fixed price or a nominal fee which has been agreed to when the lease was started
- You will purchase the equipment at the fair market value
You need to consider the state that your equipment is going to be in when the lease is over before you agree to an end-of-lease clause. At the end of the lease, you may want to purchase newer equipment. You may also want to get out of the lease early. If you think this is the case, don’t sign a lease that has a large penalty clause if you withdraw from the lease early.