Understanding Equipment Financing and Leasing
When most people of think of equipment, they don’t think of office furniture or a pizza oven; but in terms of a business equipment lease, those things are considered equipment just like a large milling machine or construction implement. Any tangible asset, other than property or buildings, used in the operation of a business may be considered business equipment.
How Does Equipment Leasing Work?
In simple terms leasing has some similarities to a loan, however it’s the lender that buys the equipment and then leases (rents) it back to you for a flat monthly fee. Most equipment leases come at a fixed interest rate and fixed term to keep those payments the same every month. Rates can vary depending upon the leasing company and your credit profile (anywhere between high single digits and 30% or more), so it makes a lot of sense to shop around before you commit. At the end of the predetermined lease term, the business owner may be able to purchase the equipment at fair market value, or a predetermined amount—sometimes for as little as $1.
Leasing is particularly attractive to business owners who need equipment that becomes outdated quickly, or is expected to suffer a lot of wear and tear over the course of its useful life, because it allows the business to regularly update equipment at the end of the lease term.
The Ins and Outs of Leasing Equipment
Many equipment dealers either offer equipment leasing through an in-house leasing department or work with other leasing companies they recommend. This can streamline the application process and make leasing equipment convenient.
Like small business lenders, a leasing company will consider your personal credit in addition to your business credit profile when evaluating your application. And, similar to many online lenders, most leasing companies today offer approval as quickly as within just a few minutes and offer competitive rates and lease terms. Leasing companies often specialize in specific types of equipment too, so make sure you’re talking to companies that specialize in the type of equipment you want to lease.
Depending upon the equipment, lease terms could extend from three, seven, or even 10 years. Because a lease is not a loan, and does not appear on your credit report as a loan, other lines of credit are not tied up in the purchase of equipment so you can use your credit lines for something else. Your lease payment might even be deductible as a business expense (this is something you should consult with your tax accountant about). The leasing company actually owns the equipment unless you buy it from them at the end of your lease term. However, your timely payments will likely be reflected on your business credit report the same as revolving debt—provided the leasing company reports to the business credit bureaus (which it probably does).
A lease may be easier to qualify for than a loan and sometimes offer more flexible terms. Typically the first and last month’s lease payments are all that’s required up front, sometimes making it less expensive than the down payment required for a typical small business loan.
Whether you decide to purchase or lease business equipment, it makes sense to make sure you completely understand the terms and know exactly what you’re agreeing to. Always take the time to read the fine print and make sure you understand it.