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Six Steps to Leasing
Big equipment purchases can get complicated especially with the variety of funding options available. These six steps break down the leasing and funding maze into a smoother process with less confusion.
- Check Credit Report
- Choose type of lease
- Select the type of lender
- Arrange the payback options
- Taylor end of lease options
- Finalize and review the terms of the lease
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Anyone in business knows the importance of having a good credit score. Leasing companies and banks want to see a consistent payment history before loaning money. Most banks and leasing companies look at company history. They are looking for businesses that have at least a 2-year track record. This is not to say that start-ups cannot get a lease, it is just more challenging and will take more work searching for a lender. Start-ups may not get as good of terms and interest rates till they have a financial track record.
Usually a down payment of 10 to 20 percent is required. It is a good idea to have all equipment needs listed with the equipment vendor. Having a total price for all needed equipment will save a few steps. All lenders will require the specifics on the cost and type of equipment to be leased.
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Types of Leases
Two basic types of leases are available. Two factors that will determine what lease is best for the photographer are type of equipment and working capital needs. The type of equipment is a factor with changing technology and equipment that needs replacing often. Working capital needs play a factor with studios that may have large receivables but are short on capital till the clients make their payments.
The two types of leases are:
- Finance Lease -This type of lease allows for the payments to be spread over time. After the lease is completed, the photographer owns the equipment outright with a small buyout at the end of the lease.
- True Lease -This type of lease is set for a specific amount of time and the photographer can end the lease agreement, purchase the equipment for fair market value or renew the lease. This type of lease can be a tax write off unlike the finance lease that cannot be used as a tax deduction.
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Types of Lenders
There are various sources for funding.
- Equipment companies - A small number of photographic equipment companies may offer leasing options or specials. Hassleblad is one of the few camera manufacturers who offer leasing specials.
- Banks - The photographer's bank is the best source of funding. The bank knows and has a financial record of the photographer and this may result in better lease terms and finance rates. If they cannot arrange a lease, they can offer advice or referrals.
- Leasing broker - These are more expensive, but they will find a bank or other source of funding for the photographer. They do all the legwork, calling, negotiating and paperwork.
- Specialty lender - This is a diversified lender specializing in funding for small businesses.
- Captive leasing company - These companies work for equipment companies or other parent companies that provide funding for exclusive types of equipment.
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There are three types of leasing payback options. The choice here depends on the photographer's (or studio) cash flow or working capital needs.
- Skip lease - The studio can miss a payment without penalty. This is good for slow times when revenue is down.
- Step-up lease - Initial payments are lower, but they increase over time. This is a great option for start-ups.
- Deferred lease - The initial payments are deferred for 60 or 90 day increments with no down payment. Down the road, the payments are larger. This is also a good option for cash strapped businesses looking to gain new clients down the road. A bit of caution, the payments will be significantly higher than the other two options because of no down payment and the deferred start-up payments.
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End of Lease Options
Most lease time periods are from 1-5 years. This is a good average time for a lease. New products come on the market and the leased equipment becomes obsolete or perhaps just wears out after 5 years. The time frame is usually determined by what the photographer plans to do with the equipment at the end of the lease.
- Return the equipment - Good for equipment that becomes obsolete quickly or equipment that does not last long
- Start a new lease - Good for specialty equipment that is expensive and the studio may not want to own or maintain
- Buyout the lease and own the equipment - Good for expensive equipment the studio wants to purchase, but needs their capital in the operating fund. This stretches out the cost over time while the photographer (studio) increases business.
- Purchase the equipment at fair market value - This option works for photographers needing a more fluid working capital at the beginning of the lease.
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Finalize the Lease
Review and understand all the costs and options of the lease. The standard down payment is a percentage of the total equipment cost. Make sure to look for other potential fees like delivery costs, training and set up fees. Understand any cancellation fees and penalties. Some lease options make the photographer liable for all costs for cancellation or early termination. Read everything and be clear on all terms and obligations before signing. This will ensure that there will not be any unwanted surprises in the future.