7 Vital Tips to know About Business Equipment Financing & Leasing
Are you thinking whether to finance or lease your business equipment?
While a lot of business entities use both options to save cost spent on business equipment, they are of different nature.
Financing your equipment gives you full ownership of the equipment; and the cost is spread over several years, reducing the cost burden on your business. Interestingly, your business maintains ownership of the asset(s) during and after the completion of payments.
Contrarily, with leased business equipment, you do not have full ownership; instead, you are given temporary access to the equipment for the agreed duration paid for. Leases are of different forms; prominent among them are Capital Lease and Operating Lease. It is important to know what each entails and the specific circumstances where they are most suitable for application.
Generally, capital leases are widely used, compared to operating leases. This wide acceptance is basically due to the fact that it gives you full ownership of the equipment at the end of the lease duration. For instance, if you wish to lease a excavator on a long term basis, a capital lease will be more favorable. Remember that ownership of equipment comes with several benefits - claiming depreciation is one.
However, operation leases will be your best bet if you look forward to replacing the leased item at the expiration of the lease term or period. Rental cost of an operating lease is recorded against the business as operating expenses. Most often, operating leases are recommended for high-tech equipment, computers, and copiers. Types of equipment that typically depreciate the quickest.
When considering the most suitable type of equipment for your company needs, there are several factors to consider. Besides total cost of purchasing or leasing, tax deductions, cost of maintenance, payment flexibility, etc. are critical elements that must not be overlooked.
To help you make a well-informed decision, here are 7 basic tips to financing and leasing of business equipment
Tip 1: Highlight Your Expectations
Clearly outline the potential benefits you stand to gain from the business equipment. Financier of the equipment may wish to know how the equipment will help boost revenue and save cost in the long run.
Tip 2: Know Your Credit Score
Determine your financial status and examine your credit card scores before reaching out to the equipment financing provider. The financing provider will certainly ask for this info – so, get ready to offer an explanation if there be any issue.
Tip 3: Compare Packages
Lots of times people assume that their bank is the best option because it may be the cheapest rate. That is not always the best for your business. Many times banks will put blanket liens over your assets and have restrictive covenants. Also sometimes banks require a large down payment and cannot wrap in the additional soft costs that your purchase may require. You've got some homework to do - Check out and compare rates, fees, lease terms, down payments, prepayment penalties and options of several providers for the best deal.
Tip 4: Examine Your Credit Rating
Evaluate your business credit score; update outdated info and correct incorrect ones before contacting any provider of equipment financing. In the event of bad information reporting, be ready to make it clear to the finance provider.
Tip 5: Avoid the mistake of sending multiple lease application to different providers.
Lessors are skeptical and may likely reject your application when they notice you have inquiries from other leasing firms - they may wonder why other companies are rejecting your application. The clue is to take out time, study, and select an equipment finance provider that offer support to your type of business – this increases your chances of approval. Some equipment brokers have the ability to look at several options without dinging your credit every time. Also some brokers will send out your info to several lenders and you will end up with many inquiries. Make sure to ask these questions.
Tip 6: Ensure you can clearly distinguish a fair market value lease from a $1 purchase open lease.
FMV lease offers tax benefits, high flexibility at the end of the lease period, as well as lower monthly payments. If you opt for the $1 purchase alternative, you have the opportunity to buy the item for $1 at the end of the lease term. The monthly payments are relatively higher than that of the fair market value lease. However, you are entitled to incentives on tax and depreciations.
Tip7: Buy multiple equipment purchase in a single lease.
For simplicity and cost efficiency, you'll be better off identifying the particular equipment needed by your business and combine the payment under one lease. This offers you a greater chance for a better deal. Typically, each lease contract has certain fees that are set and not dependent on dollar amount. If you wrap several pieces of equipment into one lease you will avoid paying several documentation fees associated with each contract.
Both business equipment lease and financing offers business operators the opportunity to boost income and remain updated with state-of-the-art technology or machinery. Equipment financing offers credit-conscious business owners a viable option that would help them save cash and cut down their spending on equipment in the organization.
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