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How does an Entrepreneur Finance Business Equipment?
Leasing:
The prudent entrepreneur must be focused on conserving the company’s working capital and lines of credit. When a company has cash, or approved lines of credit, it can capitalize on market opportunities.
The company must evaluate how it can best utilize its working capital. Accordingly, many business owners consider
leasing when acquiring new equipment, software or furniture.
There are several types of Asset Based financing. One way of generating working capital is from a
“sale-leaseback”
arrangement in which the company sells equipment it owns to a leasing company, and then leases it back. The sale will generally generate cash to the business, and create a monthly obligation to repay the financing.
Caution should be taken when utilizing a sale-leaseback due to the tax ramifications. The selling company will, in all likelihood, be required to report a gain on the sale of the equipment.
Loans and Straight Leases:
Equipment loans or leases can be one-time “loans” secured by specific equipment or done under a master lease. Often the lease term is determined as a function of the useful life of the equipment. For example, an entrepreneur might obtain a short-term (36-month) lease for a computer system that will most likely become obsolete within the lease term.
Your Credit:
As with any credit application, the entrepreneur must evaluate his/her credit. Loan decisions are typically based on the answers to the following questions:
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Does the entrepreneur have a good credit history?
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Does the business have the ability to repay the loan?
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When it becomes a requirement to obtain financing, is the entrepreneur willing to guarantee the loan/lease?
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Is the life of the equipment to be financed longer than the maturity of the loan/lease?
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Does the business have a three (or more) year operating history?
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Does the business have financial flexibility?
After credit is evaluated, the entrepreneur should evaluate the company’s equipment needs. Lenders prefer customers who plan ahead, providing the lender with an indication that the entrepreneur is prudent, responsible and organized. This approach adds credibility and increases the lender’s confidence in the entrepreneur, thereby improving the prospects of approval.
Leasing equipment can be easy and flexible, with different payment structures and end-of-term options from which to choose.
NowFinancing.com can help structure leases to fit the entrepreneur’s business needs.
Types of Leases:
NowFinancing recommends Fair Market Value (FMV) for:
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Businesses that prefer not to utilize existing credit lines
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Businesses that want off-balance-sheet financing
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Businesses that update technologies frequently
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Businesses that return equipment at the end of the lease; purchase leased items at fair market value; or continue to lease equipment on a month-to-month basis
NowFinancing recommends a $1.00 Buyout for:
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Businesses that prefer not to utilize existing credit lines
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Businesses that wish to buy leased items at the end of the lease – or enter into a sale-leaseback arrangement to raise working capital
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Businesses that prefer fixed, predictable payments for budgeting purpose
NowFinancing recommends a Fixed Purchase Option for:
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Businesses that wish to buy the equipment at the end of the lease
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Businesses that want to lock in a fixed interest rate for the term of the lease
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Businesses that purchase equipment at the end of the lease at 10% of original purchase price.
NowFinancing recommends a Sale-Leaseback for companies seeking to:
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Raise Capital by selling used equipment assets and then leasing back the equipment, enabling the entrepreneur to recover business capital
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Recycle depreciated used equipment assets into a new cycle of write-off’s
Various Payment Structures:
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Fixed Payments – A monthly payment schedule that requires the same monthly payment for the lease term
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Variable Payments
– A monthly payment schedule that can fluctuate based on the prime rate of interest or another interest rate benchmark. Frequently, this option provides for payments that are lower than the fixed payment option.
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Seasonal Payments – Many industries are seasonally sensitive and sometimes more income is generated during certain times of the year. A payment schedule can be arranged which allows payments to rise and fall in accordance with the company’s sales peaks and valleys.
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90-Day Deferred – Sometimes new equipment has a learning curve associated with it which delays the equipment’s productivity. Several equipment leasing companies offer the entrepreneur an ability to defer payments for 90 days.
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Step-Payment Plan – Similar to seasonal payments, this program is tailored to entrepreneurs who are looking for smaller payments. This program will begin with small payments upfront with increases during the term of the lease.
The Benefits of Leasing – A Summary:
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Flexibility – Lease almost any kind of equipment
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Flexibility – The entrepreneur chooses the equipment, manufacturer and model
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Flexibility of lease plans
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Profits from the equipment should pay the lease obligations
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Leasing can be the least expensive way to acquire equipment
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Longer term, smaller payments
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Virtually 100% financing, minimal or no initial cash outlay
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Build credit
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Accelerate tax write-offs
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Alleviate need to dilute equity
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Project costs more accurately
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Reduce budget restrictions
Let us help solve your financing problems! We have the expertise to save you endless hours of frustration and can guide you to the best solutions for your particular needs.
Please view and print our Equipment Leasing Application Form:
If you think Equipment Leasing can enhance your Cash Flow, or if you feel there are other ways Equipment Leasing would benefit your business, e-mail us at
CashFlow@NowFinancing.com.
A more detailed explanation of Equipment Leasing is provided in the book,
The Entrepreneur’s Guide to Prosperity -- Financing Your Small
Business, by Morris Bocian. |
