What is Equipment Lease Financing & How Does it Work?

If you’re a business owner or decision maker, and you’re looking for new equipment, you’ve probably heard of equipment lease financing. It’s a less familiar form of financing than bank loans or lines of credit, so you might wonder what it is and how it works. And is equipment leasing right for you?

7  Common Reasons You Might Need New Equipment for Your Business

Equipment lease financing might be exactly what you’re looking for if any of the following scenarios apply to your business.

 

  1. Your business is just getting started.
  2. You want to increase production.
  3. You want to automate aspects of your business to increase productivity.
  4. Your equipment needs updating to meet new technology demands.
  5. You want to expand the products or services your business offers. 
  6. Your existing equipment is causing downtime or costing your business too much for maintenance.
  7. You want to keep your business current to appeal to new clients or prospective business buyers.

 

Do any of these apply to you or your business? If so, keep reading.

What is Equipment Lease Financing?

What are the advantages of equipment leasing? How does equipment leasing compare to bank financing

Here are 7 of the most common benefits of equipment lease financing. 

  1. Maintain Cash Flow: Essentially, the equipment pays for itself while you use it. You get to keep your cash in the bank and spread the cost out with monthly payments over time. Flexible terms allow you to stay within your operating budget, and most businesses realize tax advantages by writing off the lease payments. Consult with your accountant for details.
  2. Predictability: Low, fixed monthly payments allow you to plan your monthly expenses and simplify your budgeting.
  3. No Down Payment & Minimal Security Required: In most cases, an equipment lease does not require a down payment, personal guarantee, or a General Security Agreement (GSA). Typically, the leased equipment acts as security or collateral in the lease agreement.
  4. Diversification: Equipment leasing allows you to live by the old adage, “Don’t keep all your eggs in one basket.” Increase your leverage by diversifying your debt instead of having it all with your bank.
  5. Convenience: When you lease through a lease coordinator, they take care of negotiations on your behalf and help you gather and submit the necessary documentation. Also, in most cases, an equipment lease does not demand regular submission of financial statements throughout the duration of the contract, as is often required with bank financing.
  6. Accountability: Lease documents are legally binding and hold both the lessor and the lessee accountable. 
  7. Flexibility: An equipment lease can be structured to meet the needs of your business. Flexible terms allow for unconventional payment structures like seasonal payments for seasonal businesses, such as landscaping companies.

How does Equipment Leasing Work?

When you decide your business needs new equipment, you apply for an equipment lease. 

Upon credit approval, the lessor buys the equipment on your behalf (from the vendor of your choice), with the agreement that you “rent” the equipment from the lessor according to the terms of the lease agreement. 

At the end of the lease term, you have the option to buy out the equipment. The buyout option typically ranges from $10 to 10% and is negotiated at the start of the lease. 

How do lease payments work?

You and the lessor (or your lease coordinator) will discuss a payment structure that meets the needs of your business. This will include the duration of the lease, as well as a monthly payment budget that works for you. If your business requires a creative payment structure, you may be presented with various options that might work for you. This is something to keep in mind if you run a seasonal business.

Do I need to make a down payment?

Typically, no down payment is required. In most cases, your first and last monthly lease payments are required at the start of the lease, and your regular monthly payments will begin the following month. 

That said, if you’re able to make a down payment, your lease payments can be lowered, although this is not usually required. 

I already purchased my equipment. Can I free up my cash? 

Yes, you can! The sale leaseback option allows you to sell your equipment to a lessor who will then lease it back to you. This frees up your cash while using your equipment. See Sale Leaseback: Another Financing Option Explained for more details. 

Can I lease equipment from a private seller?

Yes, you can! In fact, equipment lease financing may provide you with an added layer of protection when purchasing from a private seller. This is because lease providers always search for liens or encumbrances on the equipment. 

A private sale may also be another opportunity for you to explore the sale leaseback option mentioned above.

Can I lease used equipment?

Yes, you can! In fact, lease financing is typically easier to secure than bank financing for used equipment.

Can I sell leased equipment?

Yes, you can! To sell leased equipment, the lessor must be paid out first. You get to keep any profit from the sale, or you must pay any shortfall from the sale. On approved credit, you could also trade up or trade in the equipment, or another business can assume the lease. Please talk to us first so we can go over your options.

What happens at the end of my lease?

At the end of your lease, you have the option to buy out your equipment. The terms of your buyout option are determined at the beginning of your lease when you sign the agreement. The 3 most common buyout options are:

  1. Buy out your equipment for $10.00
  2. Buy out your equipment at the Fair Market Value at the time of the buyout
  3. Buy out your equipment at 10% of your total lease amount

How Can I Get Lease Financing for my Business Equipment?

You need business equipment, you recognize the many benefits of equipment lease financing, and now you’re wondering, “How do I get started?” 

A lease coordinator can help you get the best equipment lease for your business. You get the advantage of access to a broad range of lenders because of the extensive relationships the lease coordinator has built over time. 

The lease coordinators at Lease 1 Financial are committed to finding you the best equipment lease for your business at the best price and with the best terms for you. We’re here to help your business thrive! Contact us today to get started with equipment lease financing.