Equipment Leasing Guide for Small Business Owners

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As a financing company, we talk a lot about equipment leasing – The benefits, our program, and how you can take advantage of it. We’ve walked you through two different end-of-lease options ($1 buyout and FMV) and have provided some of our frequently asked questions.

But what we haven’t done yet is give you a complete overview. What steps do you have to take before considering equipment leasing? What is the process really going to be like? And what happens after? Read on to have all your equipment leasing questions answered.

Stage One: Answer the Important Questions

  1. What’s your monthly budget? Leasing gives you the opportunity to use new equipment instantly while you are paying it off with low monthly payments. But, before you can make the final decision, you have to know what you can afford each month.
  2. How long do you plan on using the equipment? The type of equipment you need will determine the best leasing option for you. For example, a 3-year lease on a piece of technology – like a computer – makes the most sense. But, if you are leasing a vehicle, you can get away with up to 6 years.

Stage Two: Understand the Basics

What type of equipment qualifies and what doesn’t?

As a general rule of thumb, the equipment has to be something used for business purposes. We consider those “hard assets.” However, Direct Capital will finance up to 20% of soft costs, too including training, shipping, and installation.

Another thing to consider is the cost of equipment you need. Generally, it makes sense to lease if the equipment you’re buying costs $2,000 or more. It’s rare to find leasing companies that will enter into an agreement with equipment costs less than that.

Stage Three: Determining if Leasing Really is Right for You

You have a budget in mind and you know what the qualifying equipment is, but does it really make sense for you and your business?

We understand that many businesses do have cash readily available to use on large purchases like equipment. And if that’s how you prefer to operate, then we think that’s great.

But, if you aren’t ready to uproot your cash flow like that, then leasing is definitely the better option. Yes, you will have an added monthly expense and yes you will have to pay interest. But the beauty of leasing equipment is that it works for you instantly, regardless of how many payments you still have to make. The equipment will help you improve production and increase revenue over time, while also preserving your cash flow.

Stage Four: The Leasing Process

  1. Complete the application: Direct Capital makes it easy for customers to apply by offering an online application and near-instant approvals. To complete the application, you’ll need basic business information and financial data for the company and its principles.
  2. Approval: Typically within 24 hours you will hear back from the lender about whether you were approved or not.
  3. Review your documents: Here is the important part. Make sure to carefully review the lease structure, monthly payments, fees, and interest rates before signing the documents. You want everything to be in order before sending the agreement back to the lender.
  4. Receive your equipment: Most often, equipment lenders, like Direct Capital, will work directly with the vendor to get you the equipment you requested. Once the documents and first payment is received, the funds will be released to the vendor and you will get your equipment.

Stage Five: Choosing a Buyout Option

Once you’ve decided to move forward, you need to decide which end-of-lease option you want – a $1 buyout or a Fair Market Value lease. But how do you choose?

What is a $1 buyout?

It’s any lease that has a bargain purchase option at the end.

Benefits of $1 buyout:

  • For a good cost, you will be able to own the equipment at the end of the term. Most often, that cost will be as low as $1.00.
  • If your equipment is long-lasting (like construction or auto repair), the $1 buyout is your best option because you’ll be able to keep the equipment once you’ve finished paying it off.

What is an FMV lease?

It’s one that has a residual purchase option at the end of the contract. Meaning, you have options. You have no obligation to purchase the equipment at the end of your terms, but if you do want it, there are a few things you can do. You can choose to buy it outright at fair market value (often set by the lender), give the equipment back to the lender, or choose to finance it for a longer period of time.

Benefits of FMV:

  • The fair market value lease often gives you the lowest payment of any other kind of lease and enables you to have low monthly payments.
  • It’s usually considered an expense that is fully deductible on your balance sheet because it’s not a long-term asset, debt, or liability. This gives you some tax benefits you wouldn’t otherwise have.

Stage Six: Choosing the Right Lender

“But,” you may be asking, “Shouldn’t I have considered this stages ago?”

Not entirely. If you’ve gone through the application process with one lender or bank and don’t agree with their terms or buyout options, you may want to go through it again with a different one. This way, you have choices.

You want to make sure you are choosing a lender that not only meets your financial and business needs, but that also provides top notch customer service. Going through the lending process isn’t easy, and you want your lending partner to be behind you 100% of the way.

We hope this gives you a good idea what to expect when your jump into your equipment financing journey. And, as always, feel free to reach out to our team of experts with questions or to get started. Click on the banner below or give us a call at 866-777-0117!

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