As a business owner, you know the value of economically upgrading or replacing the equipment you use in your business. Purchasing equipment can put a strain on your cash flow, but financing is also a good way to keep your business functioning.
If you need equipment but do not have the credit or down payment available, leasing is a good way to upgrade your equipment.
There is a big difference between purchasing and leasing. An equipment loan is borrowed money your business uses to purchase the equipment you need. An equipment lease is essentially a rental agreement.
Leasing is similar to an equipment loan, but the lender purchases the equipment and then rents it back to you for a monthly fee. Equipment leases have fixed interest rates and terms to keep the payments the same every month.
Leasing gives you the advantage of avoiding uncertainties that come with equipment ownership. Instead, you focus on using the equipment to run and grow your business, and the actual owner takes care of the maintenance and major repairs – if this is in your agreement. In addition, leasing is a good way to preserve your business’ cash flow.
However, leasing generally costs you more than a loan in the long run. Leasing is renting, and you are paying for equipment that is depreciating. In addition, if you lease equipment instead of purchasing it, your monthly payment seems to go on forever, and you never own the equipment.
There are several types of equipment leases. One is an operating lease, and another is long-term leasing. Operating leasing is short-term and has cancelable terms. During a leasing period, the lessor bears the risk of obsolescence.
Leases are great if you only need the equipment for a short time. IT equipment like computers, servers software, GPS, security systems, or other technology-based equipment is best purchased with buyout leases. Leasing technology equipment avoids obsolescence due to the changing aspects of technology-based equipment.
High-end clients sometimes select $1 buyout plans for equipment like construction, automotive repair, material handling, and cleaning equipment due to the longer lifecycles. In addition, a buyout lease does not require a large down payment or the worry of obsolescence.
There is another type of lease that is becoming popular. This type of lease is known as the buyout lease. The buyout lease is like purchasing equipment with a loan. You have a higher monthly payment, but you can purchase the equipment for a set amount at the end of the lease term.
The $1 buyout lease program, or capital leasing program, is gaining popularity in today’s economy. You make large monthly payments that are set amounts when you are leasing the equipment, but at the end of the lease, you purchase the equipment for just $1.00. In summary, using a $1 buyout lease is structured to pay for your equipment during the lease term, and the final $1 is just formal paperwork for owning the equipment. Most $1 buyout leases have options with terms ranging from 12 to 60 months.
A buyout lease is just like a loan. As you make leasing payments, the borrower does not own the equipment, but it may show up on your balance sheet if you treat this as a bargain purchase. If your accountant does not like this option, go with a standard lease that does not have a purchase option. This way, each lease payment can be expensed, and you do not have to show depreciation.
Equipment Financing Agreement
Equipment financing is a loan used to purchase the equipment you use in your business. There are requirements in obtaining an equipment loan. General qualifications are what lenders look at when making a credit decision on a loan. However, there are underwriting standards that vary and should be looked at before choosing a lender. Research to ensure you meet minimum requirements.
- Credit. Personal and business credit scores are important in obtaining equipment loans. Find your credit scores online and fix any problems.
- Business plan. You will need a business plan that describes your business and gives a proposal for future growth. The goal is to give lenders a comprehensive summary of what your business does, how viable it is and will be, and how your business is flourishing.
- The number of years. The number of years you have been in business is a factor, and most lenders require at least one year of operation.
- Annual revenue. Revenue statements are important to include with a business plan. Some lenders may need to see revenue with high annual sales of over $250,000. (Depending on the type of business you are operating).
Features of Equipment Loans
- Equipment loans will give you the funds to purchase new equipment, and you pay back the loan with interest and set payments.
- Business equipment loans often have lower interest rates since you are purchasing equipment long-term. Secured loans are safe for the lender, and they are willing to be flexible on credit scores, repayment, and terms.
- Equipment loans require at least five to ten percent down on the purchase and a credit score of 650. The equipment being purchased is used as collateral. Equipment loans are more accessible than traditional business loans since the equipment is used as collateral to secure the loan. If you default on the loan, your lender will seize the equipment.
- You get the title for your equipment when you finance it with an equipment loan once you have paid off the loan. Most equipment loan terms are for 12-72 months but vary by loan option and lender.
When determining if you need a business loan or a $1 buyout lease, consider how much it will cost in fees, monthly payments, and interest. Think about your long-term goals before leasing or obtaining a loan for business equipment. Ensure your equipment purchase is included in your business plan. Do not purchase business equipment just because “it’s the newest model.”
Take the time to read through the pros and cons of both leasing and purchasing equipment. Remember that leasing is renting, and you will not own the equipment after the lease – unless you do a $1 buyout.
Consider the $1 buyout. This type of leasing is almost like getting a loan without all the hassle of qualifying, showing a business plan, and having your credit checked.