If you have a startup business (a business under 2 years), you might have difficulty applying for a bank loan especially if you have no business credit history and due to the risk associated with startup businesses. Many traditional lenders and banks won’t be able to provide you with the financing you need to get started. If you need to obtain equipment, vehicles, tools, or machinery consider equipment lease financing. Leasing equipment provides businesses with many benefits which can be found below.
Benefits of Equipment Leasing
It costs less than buying equipment
At the beginning, you will not have to pay the full costs like you would if bought the equipment you need. When you lease the equipment, you don’t have to find someone who will extend your credit to make purchases.
Upgrading equipment is easier
If you purchase your equipment, you won’t have enough money to update it for a while. Leases are flexible and you can lease higher quality equipment once your lease expires. There are constant upgrades in technology, and you might want or need a higher tech option for your business.
Avoid unnecessary delays
Instead of attempting to take out a loan to purchase the equipment and waiting months for a loan to get approved, you can lease to avoid unnecessary delays in your business operations.
You can claim the costs as capital allowances if your lease lasts five years.
Fixed payments through the term of the lease
Bank lines of credit usually have variable rates, but lease payments are fixed no matter what happens in the market. When you choose to lease, you won’t be affected by high interest rates.
When you lease equipment, business owners can write off 100% of their monthly payments off their taxable income each year.
Costs and Types of Leasing Equipment
There are a couple of variables that determine the overall cost of leasing equipment for your startup business.
- Price of equipment – the more expensive the equipment, the higher the total cost.
- Credit score – the better your credit score, the better rates you will get for your business. However, you can still get financing if you have fair or poor credit as long as you have collateral, a reasonable down payment, or a security deposit.
Every lease is different but on average, companies are willing to offer 2-5-year leases with interest rates in between the ranges of 8.5-20%.
Below are some examples of the types of equipment you can secure for your startup business:
- Heavy equipment
- IT equipment
- Medical equipment
- Printers and devices
- Kitchen equipment
Types of Equipment Leasing
- Capital lease – this is where you purchase the equipment and become the owner at the end of the lease term.
- Operating lease – this is where you return the borrowed equipment to the lender and lease or purchase new equipment. An operating lease is typically used for equipment that has necessary updates or high turnover such as technology equipment.
Both capital leases and operating leases have their own unique advantages. It all depends which one is best for your business.
Pros of a capital lease
- You can claim depreciation on the asset, which in turn reduces taxable income
- Interest expense reduces taxable income
Pros of an operating lease
- You have the flexibility to replace or update your equipment
- Accounting for an operating lease is simple and easy
- Payments are tax-deductible
Equipment leasing applications are simple and quick to fill out. Approval usually takes less than 24 hours so you can get your equipment as quickly as possible. However, there a few key things you should consider first if you want to get approved right away and get the financing you need for your startup business.
Tips for Approval
- Be ready to describe how the equipment will benefit your business.
- Know your credit score and financial information. Be prepared to explain to the equipment financing provider of any issues that may arise. For example, if you had a business loss in 2013 you will need to explain why.
- Do not submit multiple lease applications to various companies. Lessors will wonder why others have rejected your application. For a better chance of approval, find a provider that caters to your specific business.
- To keep things cost effective, identify all the kinds of equipment your business needs and combine the purchases under one lease and one payment.