Equipment is one of the largest expenses for most businesses. This expense can greatly cut into available capital on hand to operate the business. Equipment lease financing can greatly stretch your available dollars. It also can provide you with tax advantages.
What is Equipment Leasing?
Equipment Leasing is a type of financing where the needed equipment is purchased for you and then leased back to you. Terms of the lease are flexible and decided upon before the lease is secured. Usually, terms from two to five years are offered. Also, you can choose whether you want to own the equipment at the end of the term or allow the leasing company keep it and lease newer and better equipment.
What is the Difference Between a Bank Equipment Loan and an Equipment Lease?
The main difference between a bank loan and an equipment lease is the amount of capital needed to obtain each one. Most banks require a 10% to 30% downpayment in order to obtain a loan. In addition to the downpayment, you will have to come up with the sales tax money. But with an equipment lease, normally all that is required is one month’s payment. The sale’s tax is paid incrementally throughout the leasing term.
A second difference is the qualifying process. It is difficult to qualify for a bank loan. Your credit has to be next to perfect. Most banks require that you be at least two years in business. Plus, it may take one or two months to even find out if you qualify for the loan.
Qualifying for an equipment lease is different. Many leasers will work with a variety of credit histories. Some will provide financing for new businesses; others may only require up to six months in business. Plus, the application process is much easier than with a bank. You should find out if you qualify within 24 to 48 hours.
How Does Equipment Leasing Work?
You choose what equipment you want and from which vendor to purchase it. Get a price for the equipment minus the sales tax. The sales tax is paid for through the leasing agency. Fill out an application. The application mainly consists of business and equipment information.
Upon qualifying, you will need to get an invoice from the vendor. You decide if you want to own the equipment at the end of the lease. The leasing institution will offer you payment options based on the length of the leasing term and the type of lease you choose.
Once the final paperwork has been filled out and signed, you arrange to pick up or have the equipment delivered. An inspection may be required to ensure that you have possession of the equipment. Once the lessor is satisfied that you have the equipment that was ordered, then they will pay the vendor.
What Types of Equipment Can Be Leased?
One of the great features of equipment leasing is that most all types of equipment can be financed. If the equipment will be used for a business purpose, then most likely, it will qualify. Of course, not all equipment leasing companies finance all types of equipment. Some leasing companies specialize in certain types.
Equipment that qualifies for leasing: Semi-trucks, trailers, manufacturing equipment, forklifts, heavy equipment, copiers, office furniture, shipping lines, warehouse racking, industrial sewing machines, CNC’s, welders, commercial use boilers and generators, commercial washing machines and dryers, airplanes, and so forth.
What Tax Advantages Come with Equipment Leasing?
Depending on the year, the federal government will allow a percentage of the total cost of the equipment to be deducted from your income taxes. This deduction is for a true or operating lease (to be defined later). In addition, the monthly payment is deductible as a business expense.
If you are working under a capital lease, then you are able to deduct the monthly interest rate from your taxes. You also can depreciate a percentage of the equipment cost each year.
ALWAYS check with a tax professional to determine what tax deductions you can take with equipment leasing in your state.
What is the Difference Between an Operating Lease and a Capital Lease?
If you search for the different types of equipment leases, many times you will see a long list. But for the most part, all of the different types of leases are a variant of two standard types of leases. They normally are a variant of an “operating lease” or a “capital lease”.
An operating lease, also known as a true lease or a fair market value (FMV) lease, is similar to a rental agreement. The lessor still owns the equipment and is leasing(renting) it to you. You have the option to purchase the equipment at the end of the leasing term at a percentage of the FMV. Normally, you can purchase the equipment at 10% of the FMV.
For example, if the equipment at purchase cost $100,000 and the buyout is 10% of FMV, you can buy the equipment at the end of the leasing term for $10,000. You do not list the equipment as an asset on your taxes because you do not own it. Your monthly payment is considered a business expense; and therefore, is 100% tax deductible.
A capital lease is structured a little different. Its structure is more like financing than renting. With a capital lease, you intend to own the equipment, and indeed do own the equipment at the time of starting the lease. The equipment is counted as an asset on your books and you can depreciate the equipment over time.
A capital lease is evident in advertising because it is often advertised with a $1 buyout at the end of the leasing term. The monthly payment is generally higher than with an operating lease since the purchasing process is occurring throughout the leasing term. Then at the end of the term, you “buy” the equipment for one dollar.
What Are the Advantages of Equipment Leasing?
- No downpayment.Usually only takes one month’s payment to start the lease and begin using the equipment. Save capital to purchase more equipment or for other business needs.
- Keep existing credit lines open.Equipment leasing is an added line of credit. Save other credit lines for other business needs. Also, leases are not listed on your credit score paperwork; therefore, not taking away from your total credit line allowed.
- Poor credit history and startup friendly.Many leasing companies can work with new businesses or businesses with credit issues. They try to build a box around you rather than see if you fit into their box.
- Fast application process.The application paperwork is usually short and approvals often happen with 24 to 48 hours. The whole process from applying to having your equipment can be as short as a week.
- Equipment can be added to your lease.As you need more equipment, instead of having to apply for another loan, just mention to your leasing company that you need to add another piece of equipment. If your credit is good enough, they will purchase it for you and just add it to your current lease. It is that simple!
Equipment can be expensive, but is necessary to make money. Equipment leasing financing can help you afford more equipment by making your existing capital go further. The process is simple; the advantages will help your company to succeed.