Leasing equipment is a quick and simple process that, if done correctly, can have an extremely positive impact on your business. It's a great way to grow your business without significantly impacting your cash flow. If the equipment you purchase will help your company make more money, it makes sense to lease the equipment rather than purchase it so you can grow at your desired rate, rather than being constrained by your cash flow. Equipment leasing is a common practice among business owners across the country. Approximately 40 percent of equipment is leased and about 80 percent of businesses lease some of their equipment.
There are five easy steps to most equipment leasing transactions that we will cover in this article, but there are an almost infinite number of types of leases. If your company has specific seasonal/financial patterns -- for example, you are not open in the winter -- let your leasing company know and they will likely be able to structure the terms of the lease to fit your specific business needs. Flexibility is one of the many benefits of leasing.
- Select equipment and equipment seller. Before you look for a leasing company or start a lease application, you should know what equipment you would like to lease. You can pretty much lease any type of equipment that is essential to your business. There are a few exceptions that are considered high risk, and these exceptions change depending on the market, but for most businesses, you should be able to lease the equipment you use to run the business. Leasing is for businesses, not individuals, so it is important that the purpose of the equipment is for business use only and not for personal use.
Figure out what equipment you need and what equipment sellers you plan to purchase the equipment from. One of the first questions a leasing company will ask you is how much are you looking to lease, so have the total amount of all the equipment you plan to lease ready. It is helpful if you can clearly explain why you want to acquire the equipment and how the equipment to be leased will help your company be more profitable.
- Gather your company’s key information. Every lease application will require similar information about your business and the owners of the company. Typically you will need:
- How long the company has been in business.
- Business bank account # and contact information.
- 3 trade references from companies that you purchase from regularly whose bills you pay on time.
- Social Security number and home address of all owners with over 15% ownership in the company. Some leases are “corp only” which means they do not require the owners' personal information, but these are usually reserved for very large companies with many years in business.
- Basic contact information for your company.
Once you have this material gathered, you are ready to apply.
- Apply. Now that you have your company's basic information ready and you know the equipment you would like to lease, you are ready to apply. Most leasing companies will have either a paper application to fill out and fax back, or allow you to apply online. The process should take fewer than 5 minutes to complete if you have your information ready. You will have to authorize the leasing company to pull the credit of the owners of the company in order to complete the application.
Once you have completed this process, you should receive an answer from your leasing company within 48 hours if you've submitted a complete and accurate application and the transaction is valued at less than one hundred thousand dollars. Larger transactions will require financial statements and possibly tax returns for the owners, and the approval process is longer.
- Pick a term and buyout option that works best for your business. There are three types of replies you will get from a leasing company after you have submitted a lease application:
- You're approved! All you have to do now is pick a term and an end-of-lease option and wait for your documents to arrive.
- You're declined. Now you either look for another leasing company or find alternate methods of financing your equipment. Be careful, since most leasing companies will do a credit report on the owners of the company. If you apply with too many leasing companies, the owners' credit might suffer.
- Need more information. Leasing companies may also ask for more information about your company if they are interested in working with you but need some more clarity on the makeup of your company.
The most common terms in leased contracts are 24, 36 and 48 months. Many leasing companies will offer specialized terms to fit your business needs but the industry standard is a 2-year, 3-year or 4-year lease. Different types of equipment will dictate different leases, for example, and pieces of equipment that will be out of date and no longer useful after 3 years will not have a 4-year term option. The longer the term, the smaller the monthly payment is, so consider how long you will use the equipment and how the monthly payment fits into your budget, and let your leasing company know what term you would like for your lease.
As with leasing terms, there are three standard end-of-lease options:
- Fair Market Value Purchase Option: At the end of the lease, you have the option to purchase the equipment for the fair market value of the equipment.
- 10% Purchase: At the end of the lease, you have the option to purchase the equipment for 10 percent of the price of the equipment.
- Dollar Buyout: At the end of the lease, you have the option to purchase the equipment for one dollar.
Selecting an end-of-lease option will impact your monthly payment so make sure you select an option that works best for your business. Depending on the leasing company, there are stipulations with each purchase option, so make sure you understand what is required before you sign your lease contract.
- Sign the lease documents and commence the lease. Once you have selected the term and end-of-lease option for your lease, your leasing company should send you the lease documents for you to review and sign. Make sure you read your contract and understand all of the terms of the contract. If you have any questions about the contract, ask your sales rep and make sure you get clear answers; all contracts are negotiable.
Most contracts will require a first and last payment with the signed documents. Once your leasing company has the signed contract back with your first and last payment, they will purchase your equipment and begin the lease. In many cases, the leasing company will call once your equipment has arrived (and is installed) to make sure everything is in working order.
Tom Williams is President of eLease Equipment Leasing. He has a degree in Economics from Boston University, has been quoted in the Wall Street Journal, Red Herring and Business Times, and is a frequent speaker on e-Commerce and Equipment Leasing on the national circuit. Tom writes regularly on his equipment leasing blog.