When you need additional equipment for your business there are numerous financing options out there. From loans to leases, the options can sometimes seem overwhelming. There are several lease options you can choose from including capital leases or finance leases and true leases or tax leases, as Phil Carlson, president and chief executive officer of Nations Equipment Finance, explained. You can lease new or used equipment. You can even sell equipment that you have and lease it back. All of the various lease types, while different, have a couple of things in common—they usually will allow you to get a piece of equipment with little money down and with a lower payment than a traditional loan.
Improving cash flow
Leasing can improve your company’s cash flow by providing lower payments than a traditional loan for the same equipment. Most leases have a lower payment is because the lessor has assumed a residual value in the equipment. So you are only paying back a portion of the value of the equipment—=the portion you are using.
Keeping equipment modern
New equipment offers lower maintenance costs and usually warranties that protect against large unexpected repairs. Giving you the benefit of less downtime for repairs and reduced maintenance costs. New equipment also makes it easier to attract top quality employees that are looking to work with the best equipment, making hiring easier.
Generating cash
Leasing doesn’t just help you acquire new equipment or equipment that is new to your business, it can help you raise working capital or money to buy additional equipment. A sale and leaseback transaction is one where a leasing company buys your existing equipment and leases it back to you.
Refinancing existing debt
Another option you have to improve your monthly debt payments and in some cases to generate cash is to refinance debt, which is secured by your equipment. Refinancing with a capital or finance lease can lower your monthly payments by as much 50%. The leasing company essentially stretches out your payments in order to reduce your monthly cost. This requires detailed knowledge of your equipment and its value over time.
Understanding the fine print
Lease contracts are usually “hell or high water” obligations to pay rentals, according to Carlson. This simply means that the lessee has signed up to make the payments and they cannot get out of the lease if the equipment breaks. If you decide you don’t need it anymore, the lease can be terminated and most leases will contain a Termination Value Schedule that spells out the amount that will need to be paid in order to terminate the lease. These leases are also called “net leases,” which means the lessee agrees to pay all taxes, insurance premiums, maintenance costs and any other expenses that would be associated with owning the equipment. Warranties associated with the equipment are transferred to the lessee and the lessee provides the appropriate insurance coverage for the equipment.
