Beware of Equipment Lease Options
Before you consider leasing equipment for your business, ask your accountant for advice. Find out if leasing will be advantageous or a costly expense. Ask yourself how long you want to utilize the equipment, what the end of lease options are, your cash available to meet monthly lease payment obligations, and how will the equipment help you expand your business.
Because almost 31% of all equipment is leased, there are some tax benefits as well as lower monthly payments. If you obtain a standard loan to purchase equipment, loan prep fees and conventional loan fees may apply.
If you need a copier that comes with all the extras or an entire network, it’s possible to lease your equipment but what type of lease should you enter into? For business startups, often leasing equipment is your only option, especially if you don’t have enough cash to purchase the equipment outright. Here are some equipment leases to consider.
Fair Market Value Lease
Also known as a true lease, the fair market value lease is one option to consider, but it often depends upon the equipment you want to lease. With a fair market value lease, you make monthly payments to the lessor and at the end of the lease you have a few options. You can renew or extend the current lease, return the equipment at the end of the lease, or purchase the equipment at fair market value.
This type of lease has its downside. Most lease companies require a down payment of at least 25% of the total cost of the brand new equipment. If the equipment you want to lease will depreciate quickly, only utilize this type of lease as a short-term option with a lease term of no more than two years. Copiers, high-line printers, and computer networks are considered good candidates for the fair market lease.
Dollar Buy-Out Lease
In a dollar buy-out lease, at the end of the lease term, you have the option to buy the equipment for one dollar. The dollar buy-out lease is great for larger and more costly equipment that you will want to keep at the end of the lease. This type of lease, also known as a capital lease, uses the equipment you want to lease as your collateral. Auto repair centers, farms, printing shops, and auto body repair shops often enter into this type of lease to meet long-term equipment needs.
Dollar buy-out leases are great if you need to finance 100% of the equipment you need to run your business. Often, only lease preparation fees are paid upfront if you qualify.
Tips on Leasing Equipment
There are some tips to keep in mind when considering leasing equipment:
- Personal Guarantees – Many lease companies require you sign personal guarantees, even if you enter into the lease with your corporate entity name. If you sign a personal guarantee and your business is unable to meet payment obligations, you could be personally responsible for monies owed. Seek out lease companies that don’t require a personal guarantee.
- Revolving Leases – If you enter into a fair market value lease, try to avoid extending or renewing the lease for the same equipment. Fair market leases should only be used for short term needs and if you expect to keep the equipment at the end, find out how much you will really have to pay on the depreciated equipment. Often you may lease a piece of equipment for $20,000 at 24 months and the cost to own it at the end may be as high as half of the initial lease loan. The fair market lease is the most desirable from the lease company’s standpoint. They are not only receiving monthly payments from you, but interest as well. At the end, if you can’t afford to purchase the equipment, you may have to return it and start anew.
- Interest Rates – Most lease companies will offer higher interest rates for new businesses. Try and negotiate the interest rate or find a lease company that offers low introductory rates.
- ACH Payments – A lease company may request that you sign up for automatic withdrawal or ACH payments from your business checking account each month. If this is something you can handle, it’s a great benefit. If your cash management is a challenge every month, you might want to find a lease company that allows you to mail them a check.
- Insurance – Don’t buy insurance from leasing companies. Instead, ask your business liability insurance carrier to include your leased equipment and name the lessor as an additional insured.
- Speak to an Accountant – Lease payments are tax deductible but it’s best to speak to your accountant on which type of lease is right for your business.
- Working Capital Leases – If you need cash or working capital for your business, some lease companies offer this type of lease; however, you must also utilize the lease company for other equipment needs. These can be difficult as you will have two lease payments each month, an ACH payment is almost always required, and the amount of working capital you get is usually on the low end.
- 30-60-90 Lease – For equipment purchases between $5,000 and $15,000, ask the equipment company if you can do a 30-60-90 day payment. These types of leases usually have no interest rates, but you must make full payment within 90 days. Once you make the last payment, you own the equipment outright.
Summing Up Equipment Leases
Leasing your equipment is often the only way to obtain equipment if you don’t have the cash to buy it. Beware of lease interest rates and personal guarantees. While lease payments are an expense and tax deductible, if you own the equipment, the depreciation on that equipment is also tax deductible. If you feel equipment leasing is right for you, speak with your tax professional to help you decide which type of lease will work for your business entity.