Equipment leasing is presently one of the largest growing forms of financing in the country. This year it is predicted that U.S. companies will finance more than $900 billion in equipment.
As the CEO of a company that acts as a broker, working closely with lenders, I've seen that most people associate commercial equipment leasing with a car lease. When you go to lease a car, at the end of the term you are required to give the car back. However, with equipment leasing, by the end of the lease term, you completely own that piece of equipment.
Why Finance Commercial Equipment?
Many times, a company cannot afford to pay cash and drain their cash reserves in order to acquire or renew the right materials to operate their business. As an alternative, they can finance it with “no money down.” In other words, businesses can spread out their costs and payments over a specified amount of time with no down payment. At the end of the lease term, the company can choose whether to return or keep the equipment. They can either own the equipment for $1 or, in many cases, the fair market value not to exceed 10% of the actual equipment cost.
Leases Vs. Loans
Commercial equipment leasing is not the same as a loan. Generally, when you take out a loan, the bank or lender will require a down payment equal to the amount of the instant depreciation of the equipment. This depreciation can range anywhere from 10% to 30% of the equipment cost. Unlike a loan, equipment leasing does not require any down payment.
Additionally, loans do not cover the “soft costs” such as installation, delivery and warranties. The soft costs often range from 20% to 35% of the equipment costs and can become a burden for many businesses already struggling with funding for the proper equipment. With equipment leases, I've found that lenders will finance 100% of all costs, including soft costs.
Another benefit of equipment leasing is the tax deductions on the lease. Companies can write off 100% of each payment as a direct operating expense and lower their overall taxable income. They can acquire up to $2 million in equipment and write off 100% in the first year. The government also gives businesses a deduction referred to as a Section 179 deduction. This deduction allows companies to deduct certain types of tangible property, like equipment, as an expense for their company. Companies should always consult with their tax professionals first about the best way to structure this.
The Commercial Equipment Leasing Process
On top of that, companies have the option to add and upgrade the equipment they lease. Many people generally believe equipment financing is limited to heavy machinery like trucks, bulldozers, tractors, etc. However, companies can lease almost anything, ranging from software programs to office furniture, computers, phone systems, copiers, etc. The strangest equipment I, personally, have ever leased was golf balls to a golf driving range.
When the pandemic is over and with the government’s investment in infrastructure, more businesses will need equipment to meet the steadily rising demand. This influx will lead many struggling companies or brand-new startups to look to lenders to help them with acquiring the equipment necessary for operating their businesses. With equipment leasing, lenders are not only able to get approvals for companies with an A+ credit score but with A, B, C & D credits as well. These companies include but are not limited to established businesses, small businesses looking to grow and startups.
When getting approved for lease financing, keep in mind that companies can be authorized for up to $300,000 worth of leased equipment with just a one-page application and the past three months of bank statements, no financials or tax returns required. Most approvals are given within 24 hours of submission, and in some cases, in just three to four hours.
A business does need to make sure that they have the cash flow to make their payments, and a personal guarantor (PG) is always needed. If a company cannot make payments, it would become the responsibility of the PG. In the case of startup companies, a strong PG would be required.
Disadvantages Of Commercial Equipment Leasing
There are some disadvantages to equipment leasing as well. With equipment leasing, you do not own your equipment outright until the end of your lease. So, if you need the equipment as collateral, you could not do so until the lease is over.
You are responsible for the care and maintenance of the equipment during the lease time. If something were to happen and the equipment was unusable, you would still be responsible for your lease payments.
Finally, consider that equipment loans can only be used for equipment. The money could not be used for other things such as hiring, expansion or expenses.
As you can see, there are advantages and disadvantages to consider when it comes to equipment leasing. However, commercial equipment leasing has been around for more than 70 years and is on track to be one of the biggest forms of financing in the U.S. It can give businesses the ability to acquire upgraded tools with the financial flexibility to continue operating. And, with no money down, companies can properly source and get funding for their equipment in an easier and quicker manner.
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