Higher Sales and Improved Margins through Vendor Financing
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“We would be out of business without vendor financing” according
to the president of a distributor of commercial strength and
cardio equipment. Almost 65 percent of this company’s
revenues are generated utilizing a vendor financing program
implemented over ten years ago. Vendor financing programs provide
manufacturers, distributors and dealers from a wide variety
of industries the capability to offer customers a convenient
way to acquire their products at the point of sale. A few of
the key benefits vendor financing provides include:
· Improved vendor cash flow through pre-funding, or
financing of the down payment, and reduced receivables through
collection of the balance upon delivery of the product
· Improved margins and higher sales by focusing the
customer on monthly payments instead of price reductions
· A faster selling cycle – fewer worries about
whether your customer has the money in its capital budget or
if they can (or will try to) find financing on their own
· Transfer of the financing risk to a third party through
non-recourse programs
· The ability to open up new markets including selling
your products outside the United States With programs that
can provide financing in amounts as little as $5 thousand,
vendor financing can be implemented to cover most asset types
and a variety of customer credit profiles including start-ups
and early stage companies. For amounts up to $100 thousand
(and higher), many financings can be approved in as little
as four hours after your customer completes a one page application.
For larger transactions, approvals can be obtained as quickly
as two business days following the submission of financial
statements and tax returns. Lease terms can extend to 84 months
for equipment with long useful lives sold to qualifying credits.
According to a southeastern manufacturer of equipment, the
flexibility, creativity and extraordinary support it enjoys
through its vendor financing program provides it with a competitive
advantage. Its vice president of sales firmly believes that
choosing the right programs and leasing company can be the
difference in winning a sales competition.
A few questions to ask in selecting the best leasing company
for your business include:
· Flexibility – Can the financier fund my A,
B & C credits? Can soft costs be included in the financing
amount? Will all credits be financed without recourse to the
vendor?
· Minimums and maximums – How small and how large
of a deal can the financier fund? Any limitations on how much
credit it can extend to any given buyer? Any overall minimum
or maximum volume requirements to create a program for your
company?
· Creativity – How many different programs structures
and end user offerings can the financier provide? Will the
financier create unique programs to meet the special needs
of certain customers?
· Service – What levels of support do you require
for sales, marketing, administration and deal structuring?
Do your customers require a personal touch or will a highly
automated system be a better fit with your sales methods? If
you can visualize your company as a one-stop solution provider
to your customer’s needs through having the ability to
offer fast and easy equipment financing, then vendor financing
may provide you with new and profitable opportunities.
Equipment Leasing Tips - Avoid Potential Pitfalls
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The benefits of leasing are many as evidenced by the fact
that 80% of US companies lease some or all of their equipment.
These benefits range from conservation of working capital to
tremendous tax advantages.
While leasing does deliver a number of benefits there are
also a few risks that you should be aware of. These risks can
create frustration and could cost your company valuable time,
energy, and a significant amount of money. With the right due
diligence your company will be able to avoid these potential
pitfalls and use leasing to help your business grow.
The following items are key elements to lease agreements and
should be reviewed and scrutinized prior to signing your agreement.
In order to ensure all risks are accounted for your agreement
should be reviewed by your attorney.
1) Purchase, Return, & Renewal
These agreements are notoriously vague in regards to end-of-lease
provisions on leases with a fair-market value residual. Specifically,
the provisions dealing with purchase or renewal of the leased
equipment at the end of term. The verbiage fails to provide
steps for determining fair-market value. Without an agreed
upon way of determining fair-market value the lessor may have
the right to dictate what that value is. If an astronomical
value is set by the lessor and you do not agree to pay that
value then you could automatically enter into another agreement
for a specified term. Terms on these extended agreements could
range from 6-12 months.
Obviously the scenario described above could cost you a considerable
amount of money if you signed the bottom line. To avoid these
agreements make sure you read your lease agreement in it's
entirety and ensure that your end-of-lease provisions are clearly
defined.
2) End of Lease Notices
Every lease with a significant residual, fair-market value
or 10% for example, will have contract language regarding end
of lease notices. These notices typically state the window
of time you have to notify the lessor of your intentions on
the residual. These notices are necessary for the lessor to
be able to take action in re-marketing the equipment, if necessary.
For example, a notice may state that you must contact the
lessor in writing 180 to 120 days in advance of the end of
term. If you fail to make your intentions known within this
window then you could be automatically entered into another
12 month agreement. The tip here is to be aware of your end
of lease notices and prepare for the action needed.
3) Extremely Low Rates
Most leasing companies draw from the same source of funds
so lease rates are fairly competitive in the market. You should
take extra caution if a leasing company is offering you a lease
rate that is significantly lower than other companies you have
gotten quotes from.
One way a leasing company can represent a lower rate and payment
is by disguising a fair-market value residual lease as a $1
Buy-Out lease. You may request a $1 Buy-Out, the leasing company
may tell you that they are setting you up with a $1 Buy-Out
residual, but the actual contract language may be very different.
If a lease is set up with a fair-market value residual the
payments over the term are lower than a $1 Buy-Out given the
same rate on both. The payments are lower because you are essentially
back loading the lease with a fair-market value residual.
If a leasing company disguises a fair-market value residual
lease as a $1 Buy-Out lease then they can present a much lower
rate. Upfront you will think you are getting a great deal on
the rate until you reach the end of term and are surprised
with a significant residual value to purchase the equipment.
Instead of paying the dollar you were expecting you could be
paying thousands.
The tip here is "If it sounds too good to be true then
it probably is". To avoid this potential pitfall make
sure the residual value to purchase the equipment at end of
term is clearly defined.
Conclusion
Leasing equipment has significant benefits over paying cash
and financing. In order to take advantage of those benefits
you will want to safeguard yourself by doing the necessary
diligence in reviewing your lease agreement prior to signing
the agreement. You need to ensure that what is discussed and
negotiated with your leasing company is properly represented
in the agreement. A final word of advice, in most cases it
would be beneficial for you to have your attorney review any
and all agreements and contracts that you enter into.
Everybody must have come across the term “leasing,” in
one context or another. Take, for example, leasing a car. If
we wish to drive a car that we can’t afford to buy or
wish to change the car often, say every three years, then leasing
the car is the best option.
When a company is short on cash but needs equipment, it can
lease it. The owner buys the equipment with a loan and then
rents it to a company for a fixed monthly fee. All kinds of
equipment, like medical or transportation equipment, can be
leased. There are different companies specializing in leasing
such equipment.
Should my company lease or buy the equipment?
One has to consider different parameters before making the
decision about leasing or buying the equipment. The most important
consideration is the financial aspect. If we wish to buy the
equipment, are we going to get the necessary credit? The equipment
might be prohibitively expensive for an emerging business.
When this is the case, a company may be better off leasing
the equipment.
If we buy the equipment, we can claim a tax benefit equivalent
to the depreciation value of the equipment. On the other hand,
if we lease it, are we going to get the tax deduction equivalent
to the lease amount we pay? Therefore one has to be very careful
about the tax guidelines and the respective lease terms while
finalizing the lease. Also remember the lease financing is
usually more expensive than bank financing. But it is easier
to obtain for small amounts. Also we can easily upgrade the
equipment after the end of the lease without worrying about
selling the outdated equipment.
How to lease the equipment
Once we decide to lease the equipment we have to search for
the best deal. A good deal will make a business success story.
On the other hand, an unfavorable deal might prove to be the
end of the emerging business. So, it is extremely important
to scrutinize the legal fine points when choosing the lease.
The leasing company will look for the best deals and will take
care of the legal issues related to the deal.
Equipment leasing is an option to look for a company that
is diversifying and may not wish to buy the equipment. Or it
may be a good choice for a company that is just starting up.
Even so, leasing might be more expensive than buying the equipment.
Medical Equipment Leasing
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Advancing technology is bringing with it new medical innovations.
We are certainly benefiting from these innovations, as in the
case of new scanning equipment. This equipment is at the forefront
of research and is very costly. To keep up with the technology,
hospitals have to update their expensive equipments regularly;
otherwise, they cannot offer the best health care to their
patients. Every time a medical establishment upgrades the equipment,
it has to sell off the old equipment.
Advantages of leasing medical equipment
Doctors starting a new practice might have modest capital
and therefore not be able to afford to buy the best, new equipment.
This will certainly hamper their business prospectus. Who will
go to a new doctor with obsolete equipment? By leasing, the
doctors can get the latest equipment and can use their cash
to run the practice efficiently.
Large hospitals might have the capital required to buy the
latest equipment, but they are in danger of getting burdened
by the obsolete, costly equipment in near future. By leasing,
the risk of ending up with an obsolete machine is minimized,
as you can build, upgrade, or add-on to the lease. In the process,
hospitals also save lot of cash, as there is hardly any upfront
amount required for leasing the medical equipment. As a result,
the hospitals can expand their business with the saved money.
Medical equipments available on lease
According to a study, the medical industry in the United States
leased approximately $ 3 billion worth of equipment in the
last year. Examples of the equipment that can be leased are
blood analyzers, CT scanners, heart monitors, and X-ray machines.
In the medical industry, businesses need to stay equipped
with the latest machines. Therefore, in such a technologically
driven business, leasing medical equipment is a more profitable
choice than purchasing it.
Financing for Your Bulldozer
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Bulldozer Financing
Ok, you’re ready to go out on your own. You’re
tired of working for the man. You have been grading and clearing
land for years and know what it takes. You have great contacts
that have plenty of work for you but you don’t own your
own dozer. And you certainly don’t have $100K or $60K
or even $30K to buy something decent that will keep working
for you.
So what are your options? Borrow money from a friend? We all
wish we had friends with this kind of money ready to hand out.
How about a loan from the bank. Well, it might be worth a try.
But banks are not usually interested in lending to new businesses
and would likely require excellent credit and a huge down payment.
Even if you were able to convince them to take a closer look
they would probably require a rock solid business plan and
financial covenants to oversee your progress.
There is another option. Equipment Leasing. Getting a lease
for the bulldozer you need may be easier that you think. If
you have decent credit you could be making money with that
bulldozer next week.
What is Equipment Leasing?
Equipment leasing is essentially a long-term rental agreement
with a buyout clause. The equipment is owned by the leasing
company during the lease while the business has possession
of and continual use of the equipment. Since the lender owns
the equipment, the equipment itself is usually the only collateral.
The buyout clause determines the business’s options at
the end of the lease. Typically, buyout options are based upon
a percentage of the original sale price (e.g. 10% or 20% buyout)
or a fair market value (FMV).
Why would you want an equipment lease instead of a loan?
1 Easier to qualify. Banks usually require financial history
of at least 2 or 3 years. Some leasing companies will finance
equipment for start-ups with a simple credit application.
2 Improve your cash flow. A new or growing business needs to
control cash expenditures. Equipment leases rarely require
a down payment. -- if anything, only a few payments in advance.
Loans require a significant down payment of up to 25% or more.
3 Tax advantages. Leases are frequently 100% tax deductible.
If you are shopping the cost of a loan vs a lease, this is
a very important factor that can make the lease a significantly
better financial solution.
4 More for your money. Since the initial cash outlay is lower
you can get more or higher quality equipment.
5 Other advantages. There are some other advantages depending
upon specific situations including balance sheet impacts, seasonal
payment options, protection from equipment obsolescence, to
name a few.
Who provides equipment leases?
Many large institutions and small companies provide leases.
Some of these lenders are focused on credit (good or bad),
a specific type of equipment (e.g. bulldozer financing or medical
equipment), large or small ticket equipment, or leaseback financing.
Many lenders specialize to be more competitive. If they are
working with clients who have less than perfect credit they
need to effectively manage any defaults. If a typical bank
were to give out a loan on a bulldozer and the business defaults,
the bank would likely loose a lot of value when trying to sell
it. To offset this risk, banks usually require a significant
down payment. A specialized leasing company can minimize this
default loss and can therefore provide better terms.
How do you find an appropriate lender?
A good small business loan broker will have access to many
funding sources and will be best able to find the right lender
for a client. These brokers are similar in function to a mortgage
broker where they select the lender and process the paperwork
to facilitate the entire lending process.
Back to your Bulldozer.
So, looking for some bulldozer financing? You may want to
talk to a business loan broker regarding the advantages of
leasing your bulldozer. A lease may help you get started sooner,
get a better dozer, and save more of your cash. And it might
just save you a lot of money in the long run.
Choosing the Best Type of Lease for Your Business
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When it comes to leasing equipment, understanding what it
can do for your business is only part of the equation. Understanding
and choosing the best lease for your business is another matter
altogether. The market is primed for the use of equipment leasing
to expand, grow and hone a businesses assets, but at the same
time there is little material out there to help a business
judge what’s a good lease and what isn’t.
What You See Is What You Get
There is an old truism that says you get what you pay for.
When it comes to equipment leasing, you want a lease that clearly
defines your responsibilities versus the lessor’s responsibilities.
You really want it to be what you see is what you get. So how
do you go about choosing the best type of lease for your business?
Shop the options is the best way to get started. If you know
what type of equipment you need, then comparison-shop the options
with different companies. Some key figures to make sure are
included in any lease option are:
• Cost Per Month
• Maintenance Contract
• Cost of Maintenance Contract
• Training Available
• Customer Service
• Availability for Software and Hardware Support
• Obsolescence Upgrades
• Term of Contract
• Renewal Terms
When it comes to long-term leases, it’s better to set
the terms from the outset to deliver the best possible results
to the company overhead. When it comes to maintenance, many
leasing companies package that as a separate component. If
a piece of equipment fails altogether, it’s likely the
leasing company will replace it. But what if the piece of equipment
goes down? Will there be a 2-hour, 4-hour or 24-hour response
time to getting a service technician on-site and the equipment
back into operation?
This information is critical because when a piece of equipment
is operable, it’s just a piece of junk taking up room
and preventing the business from operating normally. Upgraded
maintenance contracts will have to be negotiated. But there’s
also the concern about what happens when a newer, better model
of equipment becomes available? Does the lease terms support
an upgrade to this model of equipment or will it require waiting
until the contract is up for renewal?
Beware Hidden Costs
By getting the information up front, a business can avoid
hidden expenses. They can plan budgetary requirements and potentially
for long-term leases, bring up training requirements for their
staff. This is another concern that some companies don’t
consider when negotiating a lease. Will the operator of the
equipment receive training from the leasing corporation? Do
they have representatives that understand the operation of
the equipment and provide certified instruction? If not, how
is that handled?
While this will not be a concern for every piece of equipment
leased, for those businesses that require certified training
it’s good to know if it will be available. Also in the
case of leasing computer equipment, how is software licensing
handled? Is packaged into the hardware lease or do those licenses
need to be obtained separately?
Finally, understanding the renewal terms can help circumvent
a rise in cost for renewing an equipment lease. Some contracts
will allow locking a price for a period of five years. The
lease may only last two years, but at the renewal point the
cost is locked in for that particular piece of equipment. When
it comes to a long-term budgetary forecast, every piece of
information can help.
Clearly defining what an individual contract delivers from
a leasing company can provide a business with the opportunity
to comparison shop. By comparing the different options, price
levels and services from one leasing company to the next, a
business will be choosing the best equipment lease for their
business.
Financing a Dump Truck
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Financing your Dump Truck You’re looking to buy a dump
truck. Maybe you’ve been in business for a while or have
just decided to start your own business. There are obviously
many things to consider. Let’s focus on one of them.
How will you pay for the truck?
Most people, including many bankers, only know of two options.
Pay for the truck in cash or get a loan. Paying in cash is
usually not an option for most people. Not too many of us have
$50,000 or more in cash ready to spend. Even if they do, paying
in cash may not be the best use of that money. That aside,
let’s talk about a third option and compare it to a loan.
Equipment leasing is the third option but that certainly doesn’t
mean it is third best. In fact it is commonly a better financial
decision than a loan and is generally a lot easer to get an
approval.
What is Equipment Leasing? Before we discuss why it may be
a better option, describing what equipment leasing is and how
it works is in order. Equipment leasing is essentially a long-term
rental agreement with a buyout clause. The equipment is owned
by the leasing company during the lease while the business
has possession of and continual use of the equipment. Since
the lender owns the equipment, the equipment itself is usually
the only collateral. The buyout clause determines the business’s
options at the end of the lease. Some typical buyout examples
are based upon a percentage of the original sale price (e.g.
10% or 20% buyout) or a fair market value (FMV).
Why would you want an Equipment Lease instead of a Loan?
1 Easier to qualify. Banks usually require financial history
of at least 2 or 3 years. Some leasing companies will finance
equipment for start-ups with a simple credit application.
2 Improve your cash flow. A new or growing business needs to
control cash expenditures. Equipment leases rarely require
a down payment. -- if anything, only a few payments in advance.
Loans require a significant down payment of up to 25% or more.
3 Tax advantages. Leases are frequently 100% tax deductible.
If you are shopping the cost of a loan vs a lease, this is
a very important factor that can make the lease a significantly
better financial solution.
4 More for your money. Since the initial cash outlay is lower
you can get more or higher quality equipment.
5 Other advantages. There are some other advantages depending
upon specific situations including balance sheet impacts, seasonal
payment options, protection from equipment obsolescence, to
name a few.
Who provides Equipment Leases? Many large institutions and
small companies provide leases. Some of these lenders are focused
on credit (good or bad), a specific type of equipment (e.g.
dump truck financing or medical equipment), large or small
ticket, leaseback financing.
Many lenders specialize to be more competitive. If they are
working with clients who have less than perfect credit they
need to effectively manage any defaults. If a typical bank
were to give out a loan on a dump truck and the business defaults,
the bank would likely loose a lot of value when trying to sell
it. To offset this risk, banks usually require a significant
down payment. A specialized leasing company can minimize this
default loss and can therefore provide better terms.
How do you find an appropriate lender? A good small business
loan broker will have access to many funding sources and will
be best able to find the right lender for a client. These brokers
are similar in function to a mortgage broker where they select
the lender and process the paperwork to facilitate the entire
lending cycle.
Back to your Dump Truck.
So you may want to talk to a business loan broker regarding
the advantages of leasing your dump truck. A lease may help
you get started sooner, get a better truck, and save more of
your cash. And it might just save you a lot of money in the
long run.
Leasing Equipment: An Option for Small Business Financing
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Leasing Explained Leasing consists on hiring an asset which
remains the property of the lender but can be used by the borrower.
The contract lasts for a certain time at the end of which the
borrower has the option to buy the asset by paying a lump sum
(usually a small percentage of the asset’s value). If
he chooses not to do so, the contract ends or it can be renewed
by replacing the leased asset with a new one. It’s widely
used for cars and business equipment.
Benefits of Leasing Equipment Leasing equipment has many benefits;
it combines the advantages of renting equipment with those
of possession by means of loan financing. Furthermore, the
main advantage leasing provides is flexibility. Due to it’s
mixed nature, most terms are subject to negotiation.
No Money Down When buying equipment you need either to put
money down or request a loan in order to purchase the equipment.
When you lease, you pay monthly installments and get immediate
tenure. It’s just like if you were renting the equipment
only you’ll be able to acquire it if you want to at a
later occasion.
Tax Benefits When you purchase equipment, it adds up to your
taxable assets. If you requested a loan in order to pay for
it, you can deduct the costs, but the equipment remains your
property. When Leasing, you only hold possession of the equipment,
it remains property of the lender and thus, you can deduct
the monthly payments and it won’t add up to your taxable
assets.
Flexibility If the equipment becomes obsolete, you can always
request it to be replaced with a new one. Thus, you won’t
suffer the consequences of obsolescence. You can have up to
date equipment just by paying a monthly fee for it. Once you
have no more use of it, disposing of it becomes the lender’s
problem and not yours. Given all the technological changes
that occur everyday, chances are that you will make an excellent
use of this leasing characteristic. When it comes to starting
businesses and businesses in the technological field or technology
dependent, leasing is definitely the best financial alternative.
Fast Approval Since the asset remains property of the lender,
leasing doesn’t have many requirements. The contract
usually includes insurance policies attached to it so the lender
get’s rid of certain risks related to the equipment and
concentrates on its concern (financing).
Nevertheless a good credit history contributes a lot to getting
a good deal on a leasing transaction. Bad Credit can increase
the costs of leasing operations and since leasing is not the
cheapest financial option, if you have really bad credit, it
might be wise to consider other alternatives first.
Future of Equipment Leasing
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The future of equipment leasing is firmly hand in hand with
business development, small, large and everything in between.
Equipment leasing is synonymous with possibilities and what
business does not benefit from possibilities? Equipment leasing
offers businesses:
• Financial Options
• Growth or Expansion Options
• Business Potential
Financial Options
Businesses need financial capital to grow. Capital provides
a business with options from loans to investments. Equipment
leasing is tax deductible, whereas initial large investments
are deductible the first year but only a percentage thereof
is after that. Businesses hire accountants and tax experts
to help them maximize their capital. The future of equipment
leasing is in the financial options they offer to businesses,
large and small.
Growth & Expansion Options
Small businesses and the self-employed may find their growth
and expansion options limited without the options equipment
leasing can provide them. From construction to accounting to
medicine, equipment leasing provides a future for both. The
rapid growth industry for equipment lessors is matched only
by the needs of lessees.
What a company needs more than anything else is capital to
invest not only in themselves, but also their future. Equipment
leasing keeps the capital in their pockets and helps physicians,
engineers, computer specialists and even writers develop their
businesses. The future of equipment leasing is tied firmly
to the package that is the American Dream.
Business Potential
While financial, growth and expansion options are definitely
part of the future of equipment leasing. There is an untapped
source that will find its future in equipment leasing. That
source is the business potential in the entrepreneur. More
and more business entrepreneurs are leaving the wildly hectic
corporate world to start their own business.
When you go into business for yourself, there are a lot of
trepidations. First and foremost, starting a business can be
a risk for the individual and the family. Equipment leasing
can help an entrepreneur minimize their risks, plan for a future
and deal with unforeseen eventualities.
Equipment leasing can be the difference between achieving
a dream and being stuck in a dead-end job. There is a surge
in the growth of small business in the country, specializing
in personal services from web building to direct marketing
to selling homemade clothing. Equipment leasing can make all
those possibilities happen and for fraction of the cost it
would take to purchase the equipment outright.
Farmers and Other Opportunities
There’s a lot of focus placed on equipment leasing for
private physicians, medical practices, construction companies
and computer and Internet technologies. Another untapped market
that benefits from equipment leasing is farmers that work small
and large farm operations. Equipment leasing can keep the small
farmer moving on a tractor or helping to rebuild a damaged
barn.
Large equipment like tractors, backhoes, ditch witches and
scoops are a hefty investment. Farms are a tricky operation
and take a lot of backbreaking work and labor investment. When
a piece of heavy equipment breaks down, farmers have a choice
to repair it or do without. If they can’t affect the
repairs themselves or afford them, then it is more than likely
they can’t afford to go out and buy a new one. Equipment
leasing would provide the farmer not only with the equipment
to get the job done, but also to the maintenance support without
the huge output of cash.
The future of equipment leasing is in business, industry and
primarily people. It only takes a small investment to get started
and that small investment returns the dividends to the lessee
as their business and financial opportunities grow.
Benefits of Leasing Equipment
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Leasing equipment provides the lessee with all the following
benefits of utilizing the equipment without having to pay the
up-front costs or assuming the risk of ownership. A lease is
one of the best ways for businesses to stay on top of the development
curve. With so many new developments that occur (particularly
in the technology areas) equipment leasing is less financially
expensive.
Running a business means making sound financial decisions
that improve the condition and quality of a business. Equipment
leasing provides such a benefit along with:
1 Minimal Cash Outlay
2 Overcoming Budgetary Limitations
3 Avoidance of Obsolescence
4 Flexibility in Terms and Equipment
5 Conservation of the Business’ Working Capital
6 Increased Opportunities
7 Tax Benefits
8 Fast Applications
9 100% Financing
The minimal cash outlay allows a business to conserve their
own capital. A lease also provides for servicing equipment
failures. When managing a large computer room, owning all the
computer equipment would place not only the upfront cost of
purchasing the equipment, but also maintenance and repair as
needed. Businesses that conserve personal business capital
and lines of credit can handle the more mundane day-to-day
expenses and unexpected events.
Budgetary concerns over new equipment purchases can be circumvented
through equipment leasing. Operating budgets tend to be more
flexible than a capital budget. The lease terms can be as flexible
as required and are often negotiable on an individual basis.
Lease terms are usually much longer than a standard bank loan,
which makes their payment terms even better.
The ability to upgrade remains one of the best benefits of
equipment leasing. Businesses grow; technology changes and
the needs of both can change year to year. Equipment leasing
allows businesses to benefit from developments on both sides
of the aisle. Lease terms may also be structured to handle
these changing situations.
Considering this multitude of benefits for equipment leasing,
it’s not surprising that more and more businesses are
reaching out to lease their equipment rather than purchase
it. The benefits of leasing are not limited to the computer
industry or to large corporations. Small businesses can benefit
even more from equipment leasing than a large corporation may.
In a contest of leasing versus buying, leasing wins most of
the time. Imagine the small business that houses only two employees.
Their working capital may afford a couple of PCs and some exterior
accounts to host a website. When a PC in the office goes down,
if they are not leasing they will need to replace the machine.
In general, the cost of replacing a standard PC is significantly
lower than repairing one.
Small businesses need the ability to remain flexible, to upgrade
and to keep their machines in maintenance and up to date. Even
more than their corporate big brother, they need to know they
will remain on the cutting edge of the industry in order to
make better business decisions. A small construction company
that has no access to certain types of equipment will not be
able to take on more challenging jobs. The graphic’s
designer that doesn’t have the equipment to support the
latest software will find himself or herself less competitive.
An accountant that doesn’t have the disk space to maintain
growing accounts will have to turn away business.
Leasing equipment makes sense on a variety of financial levels,
but also on levels addressing future growth. The business that
takes advantage of these benefits are planning two steps ahead
of their own niche market and will likely avoid being trumped
by their competition. So whether a business is large or small,
thinking ahead provides them with opportunity. What is the
best benefit a business can receive from leasing their equipment?
Opportunity.
Resources for Commercial Equipment Financing
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Buying commercial equipment is not like buying a home or car.
When buying commercial equipment, you are investing in your
livelihood. Even after finding the equipment you need your
only halfway there. You will need financing. Thanks to the
internet, this has never been easier. Many Finance and Leasing
companies such as Prudential Leasing, Resource Diversified
Services (RDS) and others have gone digital to reach out to
businesses nationwide. These companies have given the small
business a chance to compete in their industries. What I have
found most valuable about this is how much money and time is
saved by these companies providing all the information needed
to their clients. Here is just an example of one:
* New or Used Equipment - Heavy, Medium, and Light Duty
* Titled or Non-Titled Equipment
* Non-Recourse to the Dealer/Vendor
* Application Only Programs
* Competitive Rates
* Special Finance Programs to people who have had credit programs
* All Business, Medical, Trucking and Construction Equipment
* Owner Operators OK, 2 years experience
* Over the Road OK
* Small Truck fleets OK, no minimum fleet size
I found that there are usually three things you need to start
the process to get approved:
1. Credit Application
2. Last 6 months bank statements
3. Complete Spec Sheet with VIN # and mileage.
This breakdown gives consumers a general outline of what is
needed in order to get the financing and leasing they need.
Finally, I wanted to talk about the importance of communication.
I find that most industries have stopped focusing on communicating
with their clients. I, along with the businesses I mentioned
above believe it is important for clients to have access to
their finance partners. Even if you can’t walk up to
their front door and ring the bell, companies must provide
some form of visual or vocal contact. Being able to talk to
someone in person or over the phone makes you feel like a human
being and not just number. I think this is one of the most
important things in business; to have a direct line of communication
with the client.
Maintain That One Step Lead On Your Competition,
While Keeping Your Cash Flow Healthy
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The Benefits of Leasing your IT Equipment
Many small businesses are concerned about managing cash flow;
however, they still have a need for “state of the art” computer
systems and other IT equipment to ensure that their clients
are receiving the benefit of current technology. If the equipment
is not up to date, customers may be lost to the competition
that may have seen the light.
A number of business owners are paying for their IT investments
from capital dollars and this practice maybe an affordable
solution for some. However, having the right payment alternative
in place is important for those companies that may not have
the finances in place to pay for what they need or whom would
like to conserve their cash flow.
This is why leasing computer equipment is a great solution
for small business. Leasing your technology investments will
allow the owner of a small business to “play with the
big boys” without sacrificing cash flow. Here is an example
of how a leasing solution provides the flexibility to invest
in the computer solution you need. If you have a budget of
$12,000 per year to invest in technology, however you require
a $30,000 solution in to keep ahead of your competition. By
spending only $900 a month on a lease payment, you can obtain
the full equipment complement required and still remain within
your annual IT budget. This keeps $19,200 in your cash reserves,
saves $30,000 for your available lines of credit, and saves
$1,200 of your IT budget for other areas of your business.
Leasing allows you to preserve lines of credit and cash reserves
for appreciable assets, marketing and training. Further, it
enables you to pay for your investment as your business profits
and grows.
Leasing your computer equipment and other technology will
also protect your business from equipment devaluation and obsolescence.
At the end of your leasing term you do have the option to buyout.
However, you can also trade-up and re-invest in some new equipment,
keeping your business ahead of the technology curve.
You may also be afforded some attractive tax benefits by leasing
your equipment. Your whole monthly lease payment, including
tax, is a 100% deductible business expense. Compare this to
bank financing, where only the interest portion of the payment
can be included in your business operating expenses. To pay
cash, you can only depreciate 45% of half the equipment value
in the first year, followed by half the remaining balances
in the second and third year, allowing only 80% of the value
to be depreciated from the balance sheet.
There are plenty of great leasing companies in Canada that
will be able to assist you with your leasing needs. My company
encourages leasing for our clients to ensure they affordably
have the IT systems in place that keep them one foot in front
of their competition. If you have any questions or require
more detail, I recommend you seek out a leasing expert in your
area. IT Matters works very closely with National Leasing,
headquartered in Winnipeg. National Leasing has local representatives
all across the country ready to help you find a way to pay
for what appreciates and lease what depreciates.
Top Mistakes with Equipment Leasing
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When negotiating on equipment leasing contracts, small business
and corporate accounts should review all the legal terms in
order to avoid the top mistakes associated with leasing equipment.
These rules are applicable in multiple areas of equipment leasing
from educational, computer and engineering equipment leases.
Mistakes to Be Avoided in Contracts
One of the primary mistakes made when negotiating their lease
is the use of a very short contract. The short contract text
may not address issues involving problems with software in
computer leases or litigation issues such as employee piracy.
Other issues that are not addressed in many short contracts
include:
• Software transaction agreements
• Troubleshooting Support Issues
• Clauses handling provider’s going out of business
It’s important to make sure that all parties have their
expectations clearly outlined in the contract. The contract
helps avoid mistakes in leasing equipment by detailing the
obligations of both parties. Contracts that possess clarity
and completeness are important and the shorter the contract,
the more likely there will be legal risks and ramifications
for the company leasing the equipment.
Performance Details
The contract should detail the performance of the equipment.
If someone is leasing a computer system, a server or a backhoe,
they need to know that it will handle the load they are preparing
to deliver to it. The performance details are an area where
equipment can fail in leasing if they are not clearly stated.
It’s important to make sure that both parties have those
issues clarified before closing on any contracts or deals regarding
performance issues.
Structure Defects
Structuring agreements is key to understanding where responsibility
lies. An equipment leasing agreement needs to stipulate the
structure of the deal. In other words, the salesman is unlikely
be the primary contact for system defects. The primary contact
may be the manager in charge of that account, but they will
likely only handle negotiation issues. Customer support issues
may be directed elsewhere. That structure and allocation of
responsibility must be clearly spelled out in the contract.
Equipment Hardware Leasing Specialties
When leasing computer equipment, there are often software
leases that are required. It’s important to coordinate
the duration of the software leases to be comparable with the
duration of the equipment lease. It’s important to ensure
the compatibility of all leased equipment with other equipment
from different vendors. It’s also important to make sure
that a project’s start and completion dates are commiserate
with the equipment lease. Balancing the needs of the developers
with the equipment support is a difficult thing to assess,
but it’s important to make sure that the leases support
the needs of the company small or large.
Solicitors Not Welcome
Solicitors (lawyers) are often not consulted during the initial
drafting of equipment leasing. This is a mistake, especially
for small businesses that do not possess an in house legal
team. Lawyers can help smooth the transaction and avoid loopholes
that might cause legal problems for both parties during an
equipment lease. However, when utilizing a lawyer, it’s
important to find one experienced in lease transactions.
The Results versus The Resources
Be sure to clearly define the need for the equipment lease.
Most leasing companies see themselves as providing resources.
Companies large and small are not looking for a resource as
much as they are looking for a result. It’s the end of
the line result they are seeking most of all.
Communication
Clear communication is important from the get go. When negotiating
for an equipment lease, be sure to have all questions answered
prior to agreeing. Companies make a mistake in leasing equipment
from a vendor if they have trouble getting them on the phone
or returning calls. Those issues can lead to service problems
in the future.
Be Realistic In Expectations
Client companies must be realistic about what they are expecting.
Vendors will usually negotiate and do their best to fill customer
requirements, however the client company must also keep in
mind industry standards and limitations. While technology continues
to grow, it’s important to realize that not every goal
has been achieved as yet.
Short Term Versus Long Term
The final and most important mistake made in equipment leasing
is considering a contract as something that needs to be closed
immediately in order to make a deadline that occurs in the
next few weeks. Realistically speaking, avoiding looking at
the long-term effects of an equipment lease may leave the client
with a piece of equipment they do not need or a bad contract
altogether. If their short-term goal is to launch a new product
or get the foundation of a new project started, but the equipment
will not help in the long-term goal, that should be addressed.
Capitalizing on Equipment Leasing for Your Business
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If your capital budget is tight, but you need equipment to
establish, maintain or grow your business, don't worry. Do
what most other companies do: Take advantage of equipment leasing.
Equipment leasing is a viable and very popular option for
companies large and small. In fact, 80 percent of all businesses
in the United States lease all or part of their equipment,
according to the Equipment Leasing Association (ELA).
That's not surprising, given the broad benefits of equipment
leasing. This creative financing option offers business owners
the best of both worlds: It allows you to pay only for the
value of the equipment that you use during the lease term,
rather than purchasing the equipment outright.
More specifically, the company selling the equipment simply
makes a direct referral to a leasing company. The lease financing
company buys and owns the equipment and then "rents" it
to you for a fixed monthly fee over a set period. Leases can
range anywhere from $2,000 to $2 million, with terms running
12 to 60 months.
Equipment leasing-which is suitable for any business at any
stage of development-can be used to finance all types of equipment.
Leases typically involve items such as office equipment, computers,
and trucks and vehicles. But equipment leasing can also be
used to finance software, hardware, consulting, maintenance,
freight, and installation and training costs.
Benefits of Equipment Leasing
Equipment leasing gives you the ability to have the latest
equipment for business, plus transfer the risk of technological
obsolescence to another company. Leasing offers flexible terms
and customized options that take into account your needs regarding
cash flow, budget, transaction structure and seasonal fluctuations.
And there’s generally no down payment or collateral required
with equipment leasing.
By leasing instead of buying equipment, you can leave money
in the bank that can be devoted for other expenses. Since lease
payments are usually smaller than regular loan payments, you
don't have to pay out as much each month. You don't make use
of your bank loans or lines of credit to lease equipment, and
in general, a lease obligation is not carried on the balance
sheet of your company. Also, the payments for leasing business
equipment are generally tax-deductible.
Additionally, an equipment lease is generally more easily
obtained than traditional bank financing. An application for
a small-ticket lease of less than $100,000 is generally no
more complicated than a credit card application. However, leases
for more than $250,000 require detailed financial information
from the business and a more thorough credit analysis.
Common Types of Equipment Lease Agreement
Lease agreement terms vary according to the financing company.
However, the lease structure is generally affected by your
credit rating, transaction size, asset type, industry and location.
The key to getting the most suitable type of lease is to match
the agreement to your equipment needs, cash flow requirements
and overall business goals.
When considering a lease agreement, here are some important
points to keep in mind. Most lease agreements require you to
be responsible for the equipment for only as long as it is
in your use or possession. In many leases, you're responsible
for the burden of maintenance, interest, taxes and insurance.
When the lease ends, you can opt to purchase the equipment
for its fair market value (or a fixed or predetermined amount),
continue leasing it, return it or lease new equipment.
Operating and finance leases are two of the most common types
of lease agreements. With an operating lease-also known as
a "true" or "fair market" lease-the goal
is not to pay for the equipment. This type of lease is particularly
attractive to companies that continually update or replace
equipment and want to use equipment without ownership, but
also want to return equipment at lease-end and avoid technological
obsolescence.
An operating lease usually results in the lowest payment of
any financing alternative and is an excellent strategy for
bypassing capital budgeting restraints. It typically qualifies
for off-balance sheet treatment and can result in improved
return on asset due to a lower asset base. And it can also
result in higher reported earnings in the early years of the
lease.
The finance or capital lease is ideal for companies that want
to own their equipment once the lease agreement ends, but prefer
to use the benefits of leasing to acquire equipment. A finance
lease is a non-cancellable, full-payout, agreement, in which
the lessee is responsible for maintenance, taxes and insurance.
This kind of agreement is most appealing when the lessee wants
the tax benefits of ownership or expects the equipment's residual
value to be high. The lessee purchases the equipment upon lease
termination at a pre-set amount. The term of a finance lease
tends to be longer, nearly covering the useful life of the
equipment.
10 Questions to Ask Before Signing an Equipment Lease Agreement
When considering an equipment leasing contract, make sure
you do your homework to negotiate the best terms for your business.
The ELA recommends asking the following 10 questions before
signing any lease agreement.
1. How am I planning to use this equipment?
2. Does the leasing representative understand my business
and how this transaction helps me to do business?
3. What is the total lease payment and are there any other
costs that I could incur before the lease ends?
4. What happens if I want to change this lease or end the
lease early?
5. How am I responsible if the equipment is damaged or destroyed?
6. What are my obligations for the equipment (such as insurance,
taxes and maintenance) during the lease?
7. Can I upgrade the equipment or add equipment under this
lease?
8. What are my options at the end of the lease?
9. What are the procedures I must follow if I choose to return
the equipment?
10. Are there any extra costs at the end of the lease?
Capitalizing on equipment leasing can help your business maximize
resources while minimizing costs and risks.
Getting The Equipment Lease Flexibility Your Company Deserves
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How would you like to have fewer hassles with your next business
lease while significantly trimming costs? You can. In fact,
getting better lease flexibility can easily trump getting the
lowest lease rate. Here is how you can get superior lease flexibility
while slashing overall leasing expense:
Lease Amount
First, make sure the lease allows you to include most of the
equipment you intend to acquire. You will avoid negotiating
another financing arrangement on the excluded equipment. Check
that you can easily add more equipment to the lease as your
needs change. The better lease arrangements provide for multiple
lease schedules under a master lease or the ability to amend
existing leases to make additions.
Payment Schedule
Getting a lease payment schedule that matches your company’s
cash flow cycle is a big benefit in a lease arrangement. Many
lessors are able to accommodate reasonable requests, subject
to their own administrative constraints and their view of your
company’s credit standing. Monthly and quarterly payments
schedules are typical arrangements. Schedules that vary payments
to accommodate cash flow seasonality are less typical, but
you can negotiate such an arrangement in many cases.
Interim Rent
You can slash lease costs significantly by limiting interim
rent. Interim rent is the rent you pay for daily use of equipment
between the equipment acceptance and lease start dates. Interim
rent can balloon lease pricing by arbitrarily extending the
term of the lease (albeit by only days). The best approach
is to schedule equipment delivery and acceptance toward the
end of the month, to reduce the interim period. Another strategy
is to negotiate a truncated period at the end of the lease
such that the interim period and truncated period, together,
total one monthly payment.
Upgrades
A flexible lease arrangement anticipates equipment upgrades.
Usually, at the time of upgrade, the present value of rents
associated with the upgrade can be combined with the present
value of the remaining equipment rents to create a revised
schedule.
Early Termination
Most leases do not provide for early termination. One way
to achieve more flexibility is to have such a feature built
into the lease. An amount consisting of the present value of
the remaining rents plus a termination charge no greater than
3% to 5% should compensate the lessor for an early termination
in most leasing arrangements.
End of Lease Options
Does the lease you are considering have flexible end-of-lease
options? Here are several options that will make your lease
more user-friendly: the right to return the equipment to the
lessor without undue penalty or expense; the right to purchase
the equipment at a fair or reduced price; and the right to
continue leasing the equipment at a fair or reduced rent. Use
of upper limits in fair market value purchase or rental options
can greatly reduce potential costs at lease end. Beware, however.
Lessors may insist on fair market value floors when they agree
to upper limits.
Equipment Relocation
It may become necessary to relocate the equipment to another
site during the lease term. Make sure the lease provides that
equipment may be relocated without unreasonable penalties or
charges, subject to notifying the lessor. Keep in mind that
equipment relocation may create extra expense for the lessor,
particularly if it is to be moved to another state or to multiple
locations.
End-of-Lease Notice Period
Is there a sufficient notice period at the end-of-lease for
you to indicate your desire to renew the lease, purchase the
equipment or return the equipment? The notice period generally
ranges from one to six months, with three months being typical.
If you violate the notice period, the lease kicks into an automatic
renewal period, usually one to six months. You should seek
notice and automatic renewal periods that are short, to avoid
unintended additional lease charges. If the lessor is unwilling
to negotiate this provision, you can manage the situation by
making sure the notice requirement is fulfilled within the
allowed time.
Grace Periods
Lastly, look for flexibility in the grace periods associated
with lease defaults. Typically, a lease will provide little
or no grace period for rental payments. You can achieve greater
flexibility by asking for a five to seven day grace period.
Similarly, the non-payment obligations of the standard lease
usually have a short grace period, typically less than ten
days. You can gain superior flexibility by asking for a fifteen
or twenty day grace period for these provisions.
Getting the lease flexibility that your
firm deserves may require some skillful negotiating, but
it is worth the effort. Be prepared for some give-and-take
as you look for ways to save money and avoid future hassles.
You can sign the lease that is put in front of you, or you
can follow these easy tips and bring back a great lease deal.
George Parker is a co-founder, Director
and Executive Vice President of Leasing Technologies International,
Inc. (“LTI”). A twenty-five year industry leader,
George is a frequent panelist and author of several articles
and e-books, including "Using Venture Leasing As A Competitive
Weapon" and "101 Equipment Leasing Tips".
How Leasing Companies Differ
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You have made the decision to lease
some needed equipment for your business. With several thousand
leasing companies in the U.S., how do you find the one that
is best for your firm?
The reality is that leasing companies
differ in a number of important ways. Some leasing companies
generalize while many specialize. The ones that specialize
concentrate on specific industries, lease types, certain
equipment types, or in transaction sizes.
For example, some leasing companies
specialize only in a single industry like health care, printing,
agriculture, or transportation. By doing so, they are able
to structure lease transactions tailored to the special needs
of participants in a given industry.
Others lessors focus exclusively on
a lease type. They may only offer operating leases for equipment,
offering their lessees relatively attractive monthly payment
amounts in return for the lessor retaining ownership of the
equipment at lease end. The hope of these lessors is that
the equipment will yield attractive residual values, thereby
resulting in higher transaction yields.
Some lessors specialize in full-payout
finance leases. These leases are similar to installment loans
in that the lessee usually gets to keep the equipment at
lease end by paying a nominal purchase amount. Additionally,
the lessee can calculate the transaction rate in a way similar
to that of a loan.
Still other lessors focus on lease size. Small ticket leasing
companies specialize in transactions less than $100,000. By
keeping the lease amount relatively small, lessors are able
to granulate their lease portfolios. They believe that a granulated
portfolio helps to reduce overall credit risk. For small ticket
leases, lessors employ credit scoring systems to assist in
making credit decisions. One of the requirements of lessors
specializing in small ticket leases is that company principals
guarantee the lease.
Leasing companies differ in resources and capabilities. Many
large leasing companies are owned by banks, financial companies,
or other large industrial concerns. These firms usually have
abundant resources and expertise in a number of equipment leasing
specialties.
Mid-size and smaller leasing companies greatly outnumber large
lessors. While these companies cannot match the resources of
their larger brethren, they often have highly skilled professionals,
sufficient resources and more flexibility to meet lessee needs.
More than eighty percent of U.S. leasing companies can be
classified as lease brokers. Lease brokers are independent
lease originators that serve roles similar to insurance or
real estate brokers. They profit by placing lease transactions
with the ultimate financing sources for those transactions.
Lease brokers can be useful in many ways, particularly in
finding sources for difficult or weak credit transactions.
They also excel in placing transactions that are highly specialized.
Only work with lease brokers who have high integrity, a good
understanding of leasing, and an understanding of the market
you are in.
It is important to understand the specialization of the lessors
bidding on your lease transaction. To get the most attractive
lease transaction and to avoid the run-around, stick with lessors
who focus on the type of lease you are seeking.
