What Start-Ups and New Businesses Should Know About Leasing

Many startups make the mistake of assuming that they need to take out high-interest loans or make large down payments to acquire equipment. Many startups also feel as if they do not have the credit history to be approved because most financial institutions require a lengthy financial history that new businesses do not have.

While startups and new businesses may understand the many benefits of leasing their equipment, such as conserving their cash and significant tax benefits, they also need to carefully research their equipment financing needs before signing the application. The following tips should be considered to make sure that startups and new businesses do not make any of these costly mistakes.

• Understand your business credit and organize your financial information before contacting an equipment lease financing provider.
• Do not assume your bank or the equipment manufacturer’s captive finance company will offer the best terms. Always compare rates, lease terms, fees, and options.
• Do due diligence on your proposed financing provider. Once you have a short list of providers make sure to check them out thoroughly.
• Be prepared to explain in advance any negative business results to a lease financing provider.
• Do the math and determine whether the Section 179 deduction and bonus depreciation will benefit your business or not.
• Describe to the equipment lease financing provider how the equipment acquisition will benefit your business.
• Consider bundling multiple equipment acquisitions from different vendors under one lease with an independent commercial equipment lessor. Rates tend to be higher for smaller transactions. Bundling equipment acquisitions generally results in lower rates, and also minimizes processing fees.
• Do not submit multiple lease applications to various companies. When a lessor sees inquiries from other leasing companies it raises questions as to why other lessors rejected your application. Choose an equipment finance provider that caters to your kind of business for a greater chance of approval.

Buying and maintaining equipment is expensive, and as soon as you invest in a piece of machinery, it is only a matter of time before a new version comes out, making yours obsolete. Due to the high costs involved in owning and operating equipment, many small business owners opt to lease rather than own.

Leasing is a good option for you if your business needs new equipment or technology, but you cannot afford it. Leasing lets you make small monthly payments instead of buying it all at once. When the lease is over, you can return the equipment or buy it for a price that factors in appreciation and how much you paid over the life of the lease.

Questions to Ask

Before you choose someone, get quotes from at least a few companies, and ask them all the following questions. Asking the right questions is half the battle to getting fair deal on business services and goods.

• How much money is required upfront?: lease financing provides 100% of the dues required for an equipment purchase. Loans do not, often requiring up to 20% of the total as down payment.
• Who takes advantage of the tax incentive?: Under a lease, the lessor claims depreciation. In exchange, they offer a lower APR – often half that of a loan. If the depreciation credit is important to you and you still want to lease, ask about the availability of finance or capital leases.
• Are the financing terms flexible?: Leasing is often viewed as the most flexible financing option, especially compared to loans. You can start wit how payments and increase them as time passes which is also called a step-up lease.

The Bottom Line

Business equipment financing and leasing provides business owners the ability to increase revenues and keep up with new technology or machinery. With equipment financing, a credit savvy business owner can save money and avoid spending large sums of money on business equipment.