What size business should consider commercial equipment leasing?

Any business at any stage of development should consider commercial equipment leasing as it is a very cost effective alternative to buying outright. For businesses starting with little or no income, smaller leases of $100,000 or less are easily obtained and feasible with the personal credit of the owners.

Who provides capital to leasing companies?

Of the billions upon billions of dollars that investors pour into the capital markets each month, a good chunk finds its way to leasing companies. These leasing companies then use these funds to purchase equipment (business and commercial) on behalf of the companies. As the economy improves and more and more money flows into the markets, leasing companies are flush with capital. As a result, they are eager to do business and respond to the competition with lower monthly rates.

What is a lease? A lease allows you to pass the buck, at least for a while. A lessor (third-party financing source) will buy the equipment you want, and as a 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 must have a good credit score and be able to show that you can afford the lender the negotiated payments.

Why lease commercial equipment? One of the main 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.

Also, some companies lease business equipment as a way to guard against obsolescence. When setting up the lease, take some time to assess the useful life of the equipment. Choose a term length that allows you to upgrade to newer equipment before the old parts are out of date. With end-term lease options, you can choose to purchase 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, rather than depreciating the value of the equipment as a capital expense. 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 conveyors) and office technology (copiers and LCD projectors), there’s no limit to the equipment you can rent.

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 leasing professional to find out what’s best for your business. You’ll want to be sure to inquire early on about your landlord’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: financial and true.

What is a finance lease? Finance leases are also known as capital leases, conditional sales, or dollar purchase leases. These leases are primarily for businesses that want to keep the leased equipment at the end of the lease. The advantage to the lessor in this case is that it gives you the option to purchase the equipment for a small fee, usually $1.00. This works for the lessor because the payment terms of finance leases tend to be closer to the expected useful life of the equipment and the payments themselves are higher.

What is an actual lease? Actual leases, also called tax leases, operating leases, or FMV (fair market value) leases, generally do not span the entire expected useful life of the equipment. At the end of the lease, you can choose to retire from the equipment or purchase it at fair market value. Actual lease payments are generally lower than finance lease payments, and this is because lessors have the opportunity to resell the equipment when the lease ends. This option works best for renters who want to upgrade their equipment at the end of the lease.

Commercial equipment leasing has become an increasingly popular financing option for Canadian businesses in need of new equipment.

tax implications

One of the main benefits of real leases is that you can claim all lease payments as tax-deductible expenses. Although finance leases allow you to spread your payments over time, they do not have tax advantages like true leases. Talk to your tax professional for specific advice on the tax benefits of leasing.

Payment options

While fixed monthly payments are the norm, they’re not your only option. Depending on your company’s financial situation, your equipment lease financing may include one of several payment plans that may be more attractive.

If your business’s cash flow ebbs and flows with the seasons or weather, you may want to consider what’s called a “lease.” A lease with this payment 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 a significant portion of their income.

Incremental leases provide a solution for cash-strapped businesses that rely on purchasing specific equipment to increase revenue. This type of lease recognizes that the company will be able to handle higher lease payments over time and keeps the payments low at first and then increases them according to a predetermined schedule.

An alternative to a stepped lease is a 60 or 90 day deferred lease. As its name implies, this lease allows you to defer your first payment for 2 or 3 months. You usually won’t have to put down a down payment with this option.

Ending Your Lease

Lease terms range from 6 to 120 months, though most are between 12 and 60 months.

The lease term you decide will largely depend on what you decide to do with the equipment at the end of your lease. You usually have four options. Can:

* return the equipment to the lessor without future commitment.
* renew the lease.
* purchase the equipment for a nominal fee or a fixed price agreed upon at the beginning of the lease.
* purchase the equipment at fair market value

Before agreeing to any particular end-of-lease clause, carefully consider what condition the equipment will be in at the end of the lease and whether you’ll want to upgrade to a newer model at that time. Also consider the chances that you may want to cancel the lease early; If you think it’s possible, make sure your lease doesn’t contain substantial penalty clauses for early withdrawal.

Equipment Financing Providers

There are three main types of leasing providers: brokers, captive leasing companies, or independent lessors.

runner – an equipment leasing broker is a lot like an insurance broker, they act as an intermediary. The broker will take your lease applications to banks and financial services companies that are likely to agree to finance your asset. They will negotiate the best interest rate and payment schedule on his behalf. The main advantage of using a broker is the fact that you can use the broker’s leasing expertise and the broker’s fee is paid by the bank or financial institution; his fee does not come out of his pocket, the renter.

captive leasing company – As the subsidiary leasing arm of a manufacturer or dealer, the primary purpose of a captive leasing company is to provide leasing to its parent company and/or dealer networks. You’ll usually only find them when you get a lease directly from a dealer.

independent landlord – Independent lessors are sources of financing that lease directly to businesses. These may include banks, equipment leasing specialists, and more diversified finance companies.

Choosing the right leasing provider

It is important that you evaluate prospective landlords as carefully as you are being evaluated. One way to approach the decision is to find a landlord to act as a partner. Instead of treating you like a faceless account, they should take the time to answer your questions and help you through the tough times, instead of repossessing your equipment or raising your rates the first time you’re late on a payment.

You should also look for a leasing provider with the right experience. Some landlords specialize in specific industries or loan types – a little research can quickly tell you if your potential leasing providers have the experience you need.