A great way to keep costs down for your company is to think about equipment leasing instead of buying. Countless businesses use the option of equipment financing. It’s a way of preserving capital while simultaneously balancing the cash flow into the company. Sometimes, businesses don’t have the cash readily available to purchase new equipment. A company could take out a business loan, but that is not the only option.
Leasing may be a viable choice for your company if you want flexibility in the ever-changing market. Leasing allows a business to easily return any equipment or machinery at the end of the lease term, essentially allowing the company to invest in newer materials or other areas of the business.
Easy enough, right? But I often get asked the same types of questions, which are fairly easy to answer. Here are the three questions I get asked about equipment leasing:
What are the types of leases?
The two most common type of equipment leasing are an operating lease (or true lease) and a capital lease (or finance lease).
- An operating lease is sort of like renting. At the end of the term, a company has the choice to renew the lease or not. They can essentially return any equipment back to the lessor or buy it for fair market value. The equipment is still owned by the lessor, so the company only has the rights to use it during the term agreed upon.
- A capital lease works more like a loan. Ownership of the materials or equipment can be given to the lessee at the end of the term (at less than fair market value).
How long does a lease last?
This refers to the term or length of your lease. A lease can be as short as 12 months. However, equipment leases tend to be more long-term based. Usually, a lease could have a length of 24-60 months depending on the type of machinery. It is essential that you look at all of the aspects of your lease agreement. Here are some questions you should ask yourself to determine what is the best fit for you:
- What is the cost of the materials or machinery I am using?
- What is my ideal monthly payment?
- Do I need different financing than I originally intended?
- How fast do I want to pay off my lease?
- Do I want to make smaller or larger payments at a time?
Do I need good credit to finance equipment?
Having good or even great credit can help in a multitude of situations, such as buying a house or a car. This certainly includes equipment financing. With better credit comes better finance rates.
However, equipment financing is entirely possible for companies who don’t have the best credit ratings. There are prominent leasing outlets that would be more than happy to provide a leasing agreement to businesses who have less than impressive credit scores.
Banks (and other non-specialized lenders) can often be opposed to any business or company without A or B credit. Perfect credit is hard to come by. It is important to know that there are lenders who can be more flexible, especially lenders who specialize in your particular industry–construction, restaurant, medical, screen printing, etc. Often, a flexible lender in your industry will be willing to take A,B, C, and even D credit scores. Finding the right lender is essential in getting the best rate for your business.
Do you have any other questions about equipment leasing and financing? Feel free to leave your questions in the comments, and we would be happy to share our knowledge with you!