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Equipment

Business Equipment Loans: Is It The Right Option for Your Company?

Agricultural machinery
Business Equipment Loans

If anything, 2020 really showed businesses and companies how to stay resilient during a global pandemic. COVID-19 has forced thousands of companies to evolve, to look at their current practices, or working capital to make ends meet at the end of every month. 

One of the key areas that companies have had to really focus on has been their equipment acquisition and fleet management. This area, for most companies, has had to take a back seat during the uncertain times for funds to be pushed into the day-to-day running of the business. 

The problem with no equipment being purchased or acquired for the company is that the company stagnates and stops expanding. Equipment is key for the daily functioning of the company, but it is also vital to remain competitive in a highly cut-throat environment. New equipment means new service offerings. 

Whether you are replacing old, outdated equipment, like office technology, for example, or you are looking to add a truck to your fleet, this addition will mean that you can reach more customers, or be able to service customers quicker and easier with the latest technology. 

No matter what industry you are in though, new equipment comes with a hefty price tag. So, we thought we would unpack the various options of equipment financing, and how to choose a business equipment loan that will suit your company. Let’s get stuck straight in. 

Map Your Strategic Trajectory 

The first thing you will need to do before simply going ahead and making a large purchase is doing a deep dive into your company. You will not only need to understand what the current financial standing is of the company, but also know what the strategic trajectory is for the next few months to years. 

What are the long-term and short-term goals of the company? Are you looking more at internal development, or are you on a rapid expansion trajectory? What are your competitors currently doing, and what is your competitive advantage?

Purchasing new equipment can lead to a wider service offering, or you might be able to service a wider range of customers. Let’s take a look at an example. If you are in the manufacturing industry, a large piece of equipment could mean that you can extend your product line, or even streamline some of your processes. If you are in the transport industry, a new truck or semi-truck could mean that you reach more customers in less time. 

But, you could also be in an office, and simply looking to upgrade your technology like your laptops or printers. This could mean more efficient admin or more functioning in servicing your clients. 

Have A Firm Insight Into Your Finances 

With this expansion, and additional equipment comes a price tag. In many cases, like manufacturing and aviation, this can be quite significant. So, you will need to work out what your financial standing is before simply making a purchase. Calculating what your working capital is is integral to the business equipment loan process. 

Your working capital should be sufficient enough to cater to your day-to-day operations like rent, wages, and operational expenses. It will also need to cover you in case of unexpected economic downturns. So, integrate at least three months’ worth of emergency savings into your working capital calculations. 

Take COVID-19, and the sweeping effects it had on business globally. Lockdowns forced millions of businesses into an idle state, and many struggled to maintain the day-to-day expenses of running the business. 

The purchasing of a new piece of equipment can take a massive chunk out of your necessary working capital. So, it may be worth your while to look at breaking up the purchasing price of equipment into manageable portions. A business equipment loan or lease divides up the full purchasing price into monthly installments which make up part of your monthly expenses. 

The monthly installments will be spread over a period of time, whether it be two to six years, depending on the cost and usable lifespan of the equipment. A truck, or vehicle, for example, will usually have a lifespan of around five to six years and will be financed or leased for that period of time. 

Weigh Up Your Financing Options 

The next thing to look into is what kind of financing you have to choose from. Here, we are going to delve particularly into equipment leasing and business equipment loans. 

A loan is a financing option whereby a company borrows money from a bank or finance house to purchase a piece of equipment. A lease, on the other hand, is a term rental agreement for the use of a piece of equipment.  

Based on your specific needs and financial standing, you should weigh up your options when it comes to a lease or a loan as both come with different pros and cons. A business equipment loan, for example, will have fluctuating rates, so the overall monthly cost of the equipment might fluctuate slightly, due to the change in interest rates. A lease, on the other hand, will remain at a constant monthly installment until the end of the term. 

A loan will also only finance around 60- 80% of the equipment, excluding added costs, while a lease will cover full usage of the equipment and include add usage costs. Let’s take an office printer, for example. If you are leasing a printer, the lessor will be responsible for the maintenance, servicing, transport, insurance associated fees that come with the printer. They will also be responsible to train the staff to use the equipment and for any troubleshooting needs. 

In the case of a lease, especially an operational lease, the lessor will have ownership of the equipment throughout the duration of the lease. A loan, on the other hand, means that the business taking the loan for the equipment will own the equipment. This is why they will be financially responsible for all aspects of the equipment. 

Loans are also less negotiable than leases. In the case of a lease, because the lessor still owns the equipment throughout the duration of the lease, the equipment is considered collateral. In case of payment defaults, a lessor can simply retrieve the equipment, so it is a less risky option. 

Loans, on the other hand, are riskier to financial institutions. It is for this reason that financial institutions will conduct credit checks on companies prior to providing them with a loan. So, if you are a brand new company, or have a bad credit history, you are less likely to be granted a loan than a lease. 

Know The Impact It Will Have On Your Finances

Accounting plays a large role in determining which option would be better for your company. It is important to remember that investors and future creditors will want to examine your balance sheets and statements in order to determine your levels of risk and risk appetite. 

If you currently have extensive credit, it will be less likely for a credit provider to offer further credit unless you can guarantee regular payments. It will also be important for you to know how tax-deductible the loan or lease is. In many cases, especially in leasing, you are able to write off a large portion of the amount to tax. 

Let’s take a look at the reporting of each separately. 

Loan Accounting 

The first thing that you will need to take into consideration is the term of the business equipment loan. If it is a loan taking place over just a year, it will be considered a current liability. But if it is a loan over a number of years, it will be considered a long-term liability. It is also key to know that you will also have to divide the amounts up. The amount due for the current year will be recorded as a current liability, while the balance will be recorded as long-term. 

The amount received from the bank, which will then be used to purchase the equipment and is referred to as the principal amount, will be recorded with a debit to Cash and a credit to a liability account, such as Notes Payable or Loans Payable. 

Because the principal amount is not part of the company’s revenues, it will not be reported on the income statement. You will need to enter a debit to the cash account to record the receipt of cash from the loan and enter a credit to a loan liability account for the outstanding loan.

The interest will be recorded separately as it is charged periodically and due to the fact that the interest rate might fluctuate. Interest is debited to your expense account and a credit is made a liability account under interest payable for the pending payment liability.

Lease Accounting 

Before simply delving into leases, you will need to know the difference between an operating and capital lease. A capital lease will usually result in the lessor taking ownership of the equipment at the end of the term and after a residual amount is paid off. This could even be $1 (hence why it is referred to as a $1 buy-out lease), as long as money is exchanged. 

In an operating lease, the lessor will never own the equipment, and is merely paying to utilize the equipment. This will mean that the lease is recorded similarly to monthly rent. It will be recorded as an operating expense to the company, and both the amount can be tax-deducible, and the interest written off to tax. 

In the case of a capital lease, it will be recorded differently. 

  • It will be recorded as an asset and a debit to the appropriate fixed asset account, and a credit to the capital lease liability account; 
  • Interest should be recorded regularly, on receipt of invoices. A portion of the payment should be recorded as interest expense, and the balance in the capital lease liability account;
  • Lastly, you will need to record the depreciation of the asset too. Because you will be owning the equipment like a normal asset, you will need to record the depreciation as well as plan for the disposal of the equipment. 

Find The Right Company 

The last thing to consider it who you will be gaining the financing from. As mentioned, loans are tougher to acquire than leases. Because of the higher risk, banks and financial institutions will need to examine your credit history, be provided with a business plan as well as financial statements. The process of getting a loan is more in-depth and complicated than acquiring a lease, simply due to the risk attributes. 

But, whether you are getting a lease, or a loan, it is important to research the financing company first. Especially in the case of a lease, you will need to know that you can negotiate some of the terms that come with a lease. From interest rates, to the duration of the lease, to the added costs of the lease. The lease will ultimately be benefiting the lessor, so negotiate as much as possible. 

In the case of a loan, many of the terms may be more set, but there are  aspects that you will be able to negotiate. Shop around for a company who will be open to negotiations. 

The last thing to look for in a financing company is to look for a company who will partner with you. The right company will evaluate your business, take your unique needs and company profile into consideration and structure a finance package for your unique needs. They will also have in-depth insight into the industry and market conditions, so they will be able to guide you against the risks and help you avoid pitfalls in the financing process. 

Wrapping Up 

Before entering into any financing agreement, it is important to do thorough research and due diligence prior to signing. You will also need to take each aspect of your company in consideration. Bring your financial advisors as well as tax consultants into the process as they will be able to guide you correctly and ensure that you get the most out of the agreement. 

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Equipment

5 Effective Ways to Finance Your Semi-Truck

Red Truck
Finance your semi-truck

Owning your own business comes with its own challenges. From acquiring and retaining customers to keeping your fleet on the road and financing new trucks and semi-trucks to keep your business running, you can expect a plethora of challenges. 

Vehicle acquisition and is certainly one of the biggest elements for a fleet management company. Financing a semi-truck to add to the fleet will ensure business continuity as well as business expansion. You will be able to expand your business into new territories and serve more customers with the addition of a new vehicle. But a new semi-truck means added expenses to your company. And we all know that a new semi-truck can come with a huge price-tag. 

So, we thought we would take a look at the ways that you can go about financing a semi-truck to add to your fleet. Whether it is the first vehicle that you are purchasing for your start-up, or whether you need to expand in tough financial times, we unpacked the ins and outs of financing. We took a specific look at semi-trucks and leasing, and how leasing a semi-truck could be your best option to expand your business. 

Take Your Needs Into Consideration 

The first thing you need to do is create a blueprint of your business. Where is it currently standing, what is your current financial situation, and what are your goals for the next year to five years? This overview will allow you to map out your future needs and decide what your business needs going further. 

If your strategic trajectory for the next five years is to expand and take a competitive standing in your industry, you will need to factor new equipment and fleet into your long-term plan. This will give you time to plan ahead and budget for the new semi-truck which you will need to service your increased client base. 

The next thing to consider is your risk appetite. If you are a new business with start-up capital and a somewhat inexperienced team, your risk appetite will be a lot lower than that of a long-standing business. This will mean that you will not be able to take large financial risks, and your expansion will need to be a lot more calculated. 

A large purchase like financing a semi-truck could assist your company with expansion in the long run, but, it could put immense strain on your company, especially in difficult economic times. 

Weigh Up Your Semi-Truck Financing Options 

The next thing to look into is how you will actually finance your semi-truck. There are a few options that you can choose from, each having vastly different impacts on your business. 

You can firstly buy the vehicle cash. This will mean that you have full ownership of the semi-truck, and you can list it on your financial statements as an asset of the company. Buying cash will mean that you do not need to continue monthly payments as it is a once-off payment. The problem with buying equipment and large assets cash is the fact that not many companies are actually able to put down such a large sum of cash at once. 

Especially if you are a start-up company, having enough working capital to buy new equipment cash is virtually impossible, and also hugely risky to the company. 

Working capital in your business should be used for the day-to-day operations of the business. Things like rent and wages should be included in your working capital, together with buffer savings for when unexpected events take place. 

Take COVID-19 for example. The global pandemic which has swept the globe has taken millions of companies by surprise and they have had to operate on a severely reduced income and rely on their working capital to keep afloat. 

This is where leasing comes in. Leasing a semi-truck is a far less risky option for your company as you are able to spread the payments out over a period of time. These reduced monthly payments can be divided into achievable monthly sums where you can actually make use of the vehicle. 

You can approach a leasing company and negotiate a lease that will work for both companies. In most cases, when it comes to financing a semi-truck, you can negotiate the lease duration, interest rates, and added benefits that come with the lease. Lessors are more likely to provide financing to companies, especially start-ups, as they use the semi-truck as collateral in case of non-payment.

Choose Your Leasing Option 

If you have decided to go with the leasing option, the next thing to look at is what type of lease you would prefer and what would work for your company. There are a number of different leasing options to choose from, with two highly popular options which we shall expand on. 

Operating Leases

An operating lease is the form of financing option in which the company never actually owns the equipment that they are leasing. The lessor will have ownership rights to the equipment throughout the period of the lease, as well as at the end of the period. 

Operating leases are especially handy in cases where the equipment that is being leased has a short expected lifetime and where a company will want to upgrade to the latest technology frequently.

Take office equipment like laptops and printers into consideration. These are perfect examples of technology that is constantly evolving. After around two to three years, you will want to upgrade your technology to not only have faster equipment and replace redundant technology but to maintain competitive standing. 

Companies who choose an operating lease can either choose to re-lease the equipment, return it to the lessor and lease newer technology, or even offer to purchase it. This is not as popular in the case of operating leases and is more common in capital leases. 

Capital Leases

These are also known as finance leases as well as $1 buy-out leases. In the case of a capital lease, the lessor will lease the equipment for a period of time, with the monthly payments, and thereafter buy it from the lessor. 

A residual amount is usually added to the contract for the end of the term for the company to actually make the purchase. This can be anything from the equivalent of the remaining life-time value of the equipment to simply $1. Money has to be exchanged at the end of the term for the lessee to become the owner of the equipment. 

Capital leases are more popular when financing equipment with longer expected lifetimes, like trucks and semi-trucks. These, compared to laptops and office equipment have an expected lifetime of five years and more, and it will make sense in the long-run to eventually own the equipment. 

Work Closely With Your Financial Advisor and Tax Consultant 

Depending on which option you choose to finance a semi-truck, you will need to know how it needs to be recorded on your financial statements and in your books. Buying a semi-truck outright will be recorded differently from if you are leasing it, and even then, there are differences when it comes to different types of leases. 

If you have decided to go with the cash purchase option, it will be recorded as an asset on your financial statement and will be recorded as a debit and credit of the same amount. 

It is also important to know that you need to also keep depreciation in mind as you will actually own the vehicle and because this will be producing an income for your company. Recording the depreciation is somewhat simple, you will just need to know the expected lifetime of the semi-truck. In the case of vehicles and trucks, they are usually given a five-year lifespan, so you can divide your purchasing price by five and list that as your depreciation amount. 

Leasing is recorded completely differently, however. In the case of capital leases, because you will eventually own the semi-truck, you will be listing it as a credit, however, you will not need to take the depreciation in mind until you actually own the semi-truck. 

Operating leases are in a totally different league of their own. Think of how you record rent on your financial statements.  it will not be conveyed on the balance sheet and will not be considered a company asset. Operating leases are recorded as expenses on the financial statements and are also expensed on the income statement. It will therefore have an impact on both the net income as well as the operating income of the business. 

The next thing to consider is the impacts that it will have on your tax. Leases are considered tax-deductible as “ordinary and necessary” business expenses and can be written off to tax. In the case of operating leases especially, where you do not need to take the depreciation of the semi-truck into consideration at all, it will not be considered a debt, and you can also look into writing off the interest. 

If you work together with your tax consultant and financial advisors, you can get enough of the monthly payments written off that you could end up spending very little on the financing of your semi-truck. 

Take time to consider your financial reporting. Your financial statements will be closely scrutinized by investors and future creditors, and leases are especially attractive on the balance sheets to both. Not only are you less of a risk to both, but they will be able to confirm business expansion and continuity with the monthly expenses. 

Shop Around For The Right Financing Company

The last bit of advice that we have to offer is to ensure that you get the right financing company on your side. Not only will you need a transparent and reputable company to provide you with financing options to lower your risk, but you will need to consider them partners. 

A good financing company will actually take your needs and unique company position into consideration when providing you with a lease for your semi-truck. They will also have in-depth knowledge of the industry and be able to pinpoint where the risk lies for the company and understand the industry and the market. Should the market be fluctuating, for example, the financing company should have in-depth knowledge about this and be able to guide you in the right direction. 

Consider also hiring a company that will be negotiable when it comes to your leasing terms. From the interest rates to the duration of the contract, a good financing company will be able to structure a package around what your company needs and requirements are. 

Take the added costs into consideration too. Elements like maintenance, insurance, transport fees, and licensing fees can also be included in the lease agreement should you negotiate with the financing company. This might be a bit trickier in the case of a capital lease, but, it will be incredibly beneficial in the beginning stages of your lease agreement. 

Maintenance plans are especially important in semi-truck financing, so even if you negotiate the first few years with the lessor, make sure you include a maintenance and service plan in your budgeting. Not only will it save you money in the long run, but it will extend the lifetime of your vehicle. 

Wrapping Up

Financing a semi-truck can be a big decision to make, especially if you are a small company with little working capital to back the expense. But, with the right company behind you, together with a knowledgable and expert financial and tax consultant, you will be able to add the semi-truck to your fleet and ensure your business continues to run and expand according to your set goals. 

Spend time doing research into the right semi-truck for your needs and take energy efficiency into consideration. If the budget is tight, you will want to spend less on the running of the vehicle, and that will cost you less in the long run as well. 

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Equipment

5 Smart Tips for Adding A New Truck to Your Fleet

Red Truck
Truck financing

If you are a business owner, you will know that with the expansion of your business, comes the need to add more assets to your operations. If you are running a fleet, no matter how big or small, this is most certainly the case. 

The fact of the matter is that in order to remain competitive and continue growing, you will need to keep adding trucks and vehicles to your business. But, this naturally does come at a cost for your business. 

Despite the global fleet industry’s value exceeding $15 billion in 2019, the industry, in general, is seeing a dip in profits. Not only are companies focussing more on operational efficiency, but the COVID-19 pandemic which has swept the globe has had huge effects on the fleet and trucking industry. In fact, the industry is seeing a 58% reduction in overall drive time, which will have a large impact on the global market. 

With this in mind, the importance of growing your fleet, and your business cannot be undermined. So, we thought we would take a look at ways for you to add new trucks to your fleet, what the truck financing requirements are and how you can work out the best truck financing rates for your business. 

Pre-Plan Your Fleet Strategy

The first thing you need to look at before going out and making a large purchase is your company’s financial standing, the growth trajectory, and the strategy for the next one to five years. Adding a truck, or several more trucks to your fleet can be a huge cost to your company, so you will need to weigh up the pros and cons before you simply jump in. 

One of the first things to consider is the risk appetite of your company. Working together with your accountant is key at this point to establish the financial stability of the organization, as well as how much leeway you have in economic instability. 

Consider, for a moment, the impact that COVID-19 had on businesses globally. It was a sudden, and unexpected downturn that wreaked havoc on an organization’s working capital. Companies found themselves in a position where their highly reduced working capital had to keep the company afloat for longer and had to carry more expenses than usual. 

Next, consider your strategic trajectory and your company’s goals for the next 6 months, year, and five years. What are you aiming to achieve? Are you looking to branch out into other avenues of business? Or are you looking to expand your fleet to different parts of the country? This will give you an indication of what kind of vehicles, and how many you should be adding to your fleet over a period of time. 

Lastly, consider the energy efficiency of the vehicles that you are choosing. Not only is there a general trend toward going green, but choosing the correct vehicle can also save you thousands in the long run. Not only can maintenance be cheaper on more efficient trucks, but you can end up spending less on fuel. 

Consider Your Purchasing Options

The next thing to look at is what options you have when it comes to actually acquiring the truck. The first option that you have is to buy the truck outright with cash and be the sole owner of the vehicle. This naturally comes with its perks and benefits as you do own the vehicle and it can be cheaper than truck financing in the long run. 

For small businesses and cash-strapped companies, however, this could be impossible. Trucks and equipment usually come with a big price tag, and in a lot of cases, a company just simply does not have the capital available for a massive cash purchase. Even in the case of larger organizations, a financial advisor will usually advise against a large cash purchase like this due to the risks involved. 

As we mentioned earlier, COVID-19 was a prime example of how a company’s cash-flow can be impacted suddenly and devastatingly. Your working cash-flow will need to be set aside for day-to-day expenses like rent and staff wages. 

So, what is the alternative you may ask? Leasing is one of the most popular and viable options for companies to acquire new trucks and equipment for their business, without the huge initial outlay of cash. 

Truck financing comes with several benefits too, depending on the type of lease you opt for. There are generally two different types of leases; a capital lease and an operating lease. A capital lease is a contract that allows a company to pay monthly installments to the lessor for the use of equipment, with a residual amount attached at the end of the period. Once this has been paid, the lessee becomes the owner of the truck. 

In an operating lease’s case, there is no residual, and the lessee never actually owns the truck. They can choose to re-lease it or give it back at the end of the period. In these cases, companies can easily upgrade their trucks and ensure that they have the most modern and top-of-the-range vehicles in their fleet as they can simply sign a new lease for a new truck. 

Work Out The Benefits For Your Finances

Truck financing has varying impacts on your financial statements, cash-flow statements, and your taxes. It is important to know, especially if you are a start-up company just what each entails.  

If you have bought the truck in cash, you will need to record it differently than if you have leased it. A cash purchase will be recorded as an asset on your financial statement and will be recorded as a debit and credit of the same amount. 

However, because you own the vehicle, and because this will be producing an income for your company, you will also need to record the depreciation of the asset. Vehicles and trucks are usually given a five-year lifespan, so you can divide your purchasing price by five and list that as your depreciation amount. 

Leases are recorded differently, especially in the case of an operating lease. Because you will not own the vehicle, it will not be conveyed on the balance sheet and will not be considered a company asset. Think of it similar to rent. Operating leases are considered expenses on the financial statements and are expensed on the income statement. This, in turn, impacts both the net income as well as the operating income of the business. 

Operating leases are also considered tax-deductible as “ordinary and necessary” business expenses, and can be written off to tax. Because it is not considered a debt, and because you are not reporting the depreciation, your truck can be written off to debt. Speak to a knowledgeable tax consultant for further advice, as you can also write the interest off, thus not spending too much on your truck. 

The last thing that you need to consider about acquiring a truck is how it will appear on your books to other creditors and investors. Usually, if you have signed an operating lease, or own the truck, it will appear on your balance sheets as an asset. This could discourage other creditors from giving you further lines of credit. Operating leases are also more welcomed by investors due to the fact that you have included integral equipment as an operating expense. 

Take Other Costs Into Consideration 

Whether you are leasing or buying outright, you will need to keep in mind the other costs that come with acquiring a new truck. Costs like insurance, maintenance, licensing, and transport and fuel need to be considered in the planning stages of the acquisition. 

If you are purchasing the truck yourself and owning it, you will need to cover all of these costs yourself. When it comes to maintenance, there are a number of maintenance plans that you can sign up for to ensure that your truck receives regular serving and maintenance to extend its lifetime. 

With leasing, this can be even easier. In the case of an operating lease, the lessor will be primarily responsible for the continued maintenance of the vehicle. Whether it is preventive maintenance or regular servicing, this will usually be included in the lease contract. 

Capital leases might differ in this, so make sure you check your lease carefully. In some cases, the lessor might include a maintenance plan in the contract, while others might leave it up to you to do. They will only take responsibility for it, however, while they still own the rights to the equipment, so make sure you have a plan for the end of the lease and for when the equipment becomes yours. 

Find the Right Financing Partner

When it comes to truck financing, having the right financing company is key for the smooth running of the leasing period. Lessors have very little risk when it comes to leasing equipment and vehicles to companies as they use it as collateral. So, if the lessee starts defaulting on their payments, the lessor can simply take back the truck. 

The leasing process is also usually somewhat simple, and to-the-point. Credit checks are usually done, but are not critical, which is good news for a small business or start-up which has little to no credit history. Applications can take a few hours to a day or two to be approved, and the lessee can receive their new truck within a short period of time.

It is important, however, to make sure that you get the right company on your side if you are leasing. This company will be entering a financial contract with you and will need to be as transparent and accountable as possible to ensure that your money is being spent effectively.

It is highly advisable to find a financing partner who will treat you as a financial partner. Having a company whose staff has years of experience in the industry and who are experts in the field will be a huge advantage to you. If they are also keeping up with market trends and fluctuations, they will be able to advise you correctly and be able to guide you away from the pitfalls and risks of a lease. 

Lastly, make sure you find a lessor who is flexible. There are a number of terms on the contract that can be altered to suit your unique needs. The duration of the contract, interest rates, the residual amount, and added costs and fees can all be negotiated and worked out. So, find the right company who will work with you, and you won’t look back on the lease. 

Wrapping Up 


When expanding your business, it is integral to consider all aspects of adding new equipment, vehicles, and cost-heavy expenses to your business. From the risks that come with the truck to your financial stability, to the financing partner, ensuring all elements are carefully mapped out will ensure your stability throughout the use of the truck. For a financing partner, you can trust, make sure you do your research, and only choose reputable and respected companies like Equipment Finance Canada for your financing needs.

Categories
Equipment

Equipment Financing for New Businesses

Excavator machine
Equipment Financing for New Businesses

Kicking off a new business can be an exciting yet daunting task. Some of the biggest challenges for new businesses are the start-up costs and getting enough capital together to get the business off the ground. A key expense in a business is the equipment that actually allows the business to function. 

Equipment makes up the top three biggest costs in the business, the other two being manpower and rent. Depending on what business you are starting, equipment can take up at least 56% of your startup costs. Hospitality and restaurants, construction, and fleet make up some of the most expensive businesses to kick-off, with technology start-ups being a bit lighter on the pocket than these industries. 

So, what do you need to know about equipment financing, and how can you work it into your strategic plan? We broke down how you can go about finding the right solutions for your equipment, which options would work best for your company, and the advantages and pitfalls to watch out for when acquiring new equipment. In particular, we are going to be unpacking equipment leasing and how it can benefit your company. 

Take Your Finances Into Consideration

The first thing you are guaranteed to look at is just how much you have to spend on equipment. Being a new business or start-up, your capital is most likely going to be somewhat limited for large purchases. The working capital that you do have in hand should be used for day-to-day operational costs like your rent and wages and in case of unexpected expenses and drops in initial cash-flow. 

Take into consideration the impact that COVID-19 had on businesses globally. Many businesses did not have enough working capital in reserve for the halt in income. This meant that their day-to-day expenses could not be met and excessive lay-offs were seen, while hundreds of thousands more shut their doors entirely. 

Leasing allows you the option to not use this vital working capital for large expenses like equipment. It provides you the opportunity to work it in as monthly payments for a duration of time that are manageable and less financially risky to the business. 

Do You Have A Credit History?

If you are looking at asking for credit from a financial institution, one of the things to keep in mind is your credit history. Due to the fact that you are a new business, the business is not expected to have a credit history that financial institutions can refer to to provide you credit. Leasing companies are less stringent when it comes to that. 

Because they use the equipment as collateral, they are more likely to sign a contract with a new start-up business. Should the company default on the payment, they simply need to take the equipment back. This means less risk for them as lessors, but as a lessee, you will still need to continue honoring the contract. 

Leasing companies are also more likely to take the business owner’s credit history into consideration when signing the contracts. This provides more security for the lease for both parties, and can also lower the interest rates of the monthly lease payments. Remember, the more risk you are, the higher the interest you are likely to pay. 

Work Out Your Options 

The next thing to look at is what actual equipment financing options you have available to you. Much of this will be determined by what kind of equipment you will be needing. If you are looking for equipment with a long lifespan, you will be looking at a totally different option than you would be for equipment that becomes redundant quickly. If you would also like to eventually own the equipment, there are also options in leasing for that. 

Let’s look at an example. Things like printers and laptops are office equipment with a useful lifetime of around two years. After that, they start to become redundant as technology evolves and more sophisticated and useful versions are launched. Buying this equipment will, in the long run, simply cost you more as you will be replacing the equipment frequently. You will also have to dispose of the equipment correctly, which can also be a cost burden to you. 

In these cases, operating leases could be your best option. An operating lease is a contract in which a lessor provides the lessee equipment at a monthly rate for a set duration of time, after which, the equipment is returned. The lessee can choose to upgrade at the end of the term, cancel the contract completely, or, if need be, re-lease the equipment. 

A capital lease, on the other hand, is more suited for equipment with a longer lifetime value. These leases usually come with a residual, or in some cases, a $1 buy-out in which the lessee can take over ownership of the equipment. This is one of the less risky, and most affordable way to eventually own the equipment you need to operate your business. 

What Extra Costs Can You Afford?

When it comes to equipment, you need to take other costs into consideration, further than just the overall outlay of what it will cost. Equipment will come with a plethora of extra costs that you need to take into consideration when signing a lease. Take maintenance, insurance, licensing fees, transport fees, import fees, and even training into consideration. These are all associated costs that come with the purchase of equipment. 

Equipment financing can take some of those risks off you. In operating leases especially, where the lessor will always own the rights to the equipment, these costs will be factored into the lease and covered by them. 

Think back to that printer, for example. The leasing company will be responsible for the regular maintenance and repairs of the printer, as well as the insurance of the equipment. The lease will include the leasing company delivering the equipment and providing a consultant to train your staff on how to use the new printer. 

It might differ in capital leases, however. Because you, as a lessee will eventually be owning the equipment, you could be responsible for these costs. The insurance and maintenance will most likely be your responsibility throughout the duration of the term. However, if you can, you could potentially negotiate them to be included in the terms for a period of time. Leases with maintenance plans added on is the optimal equipment financing option for most companies looking to acquire equipment. 

How Will It Impact Your Books?

This is a key aspect of equipment financing and choosing the right option for your business. If you purchase new equipment cash, you will be reporting it differently on your financial statements than if you are financing it. 

Cash purchases are recorded as an asset on your financial statement and will be recorded as a debit and credit of the same amount. But, because you are the sole owner of the equipment, and it will be generating an income for your company, you will need to take the depreciation of the equipment into consideration. Say, for example, you are purchasing a truck with cash to start your fleet management business. Vehicles and trucks have a five-year lifespan; so divide your purchasing amount by five and include that on your financial statements as your depreciation amount

Leases are completely different and will have less impact on your balance sheet. Operating leases, in particular, are less risky. Because you will not be owning the equipment, it will not be recorded as an asset. It will rather be recorded as a business expense on the financial statement and expensed on the income statement. So, think of a lease as rent, which is recorded similarly. You will not need to take the depreciation of the equipment into consideration either and impacts both the net income as well as the operating income of the business.

Think of Taxation and Future Financing 

Leasing comes with extraordinary tax benefits. Because they are recorded as expenses to the company, you can claim back from tax for your equipment financing. Operating leases, in particular, are recorded as “ordinary and necessary” business expenses, and can be written off to tax. 

Because an operating lease is not recorded as an asset and because it is a debt for the business, that debt is fully tax-deductible. If you go further, the interest on your lease can also be written off. So, before you simply jump into a lease agreement, get some advice from a tax consultant and work out the best agreement with the lessor. You might find that most of the financing for your equipment can be written off. 

Lastly, consider the ramifications of new equipment when it comes to investors and future lines of credit. Remember, credit providers and investors will be looking at your financial statements to determine your risk and creditworthiness. Leasing allows more room for future credit lines in the future. Investors will also determine that the monthly expense of equipment is less risky for them and will most likely be more open to investing in you. 

Last Thoughts

The last thing you should take into consideration for your new business is who you choose as your equipment financing company. Because the equipment is going to play a large role in your business continuity, as well as be a long-term expense for you, you will want a company that will work together with you. Financing companies need to be considered partners rather than just lessors. You will want them to take your unique business needs into consideration, ad structure a deal that suits you. 

They will also need to be reputable and experts in their industry and be able to advise you on any pitfalls and challenges that you might come across. Knowing the trends and fluctuations in the market will also be important as they might pose a risk for you, so get someone on your side to make sure you make the right financial decision for your business. 

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Equipment

Why Your Construction Business Should Consider Equipment Financing

Construction machines
Equipment financing, especially construction equipment financing, refers to the types of businesses that provide construction companies with the needed capital to purchase the necessary equipment to keep their business running.

2020 has been quite a year. With the global spread of the COVID-19 pandemic and far-reaching lockdowns, businesses all over the world have had a tough time trying to keep their doors open. One industry that has taken a particularly hard hit has been the construction industry. Projects have had to be put on hold, timelines extended and reduced crews have crippled companies all over the world.

It is projected that the industry has declined from around USD11,217.4 billion at the end of 2019 to USD10,566.8 billion in 2020. With that being said though, recovery is expected to push the industry beyond the initial expectations.

So, even with the current economic difficulties construction companies face, there is a new wave of business expected. If you are a business owner of a construction company, you will naturally want to ensure that you are part of the wave, despite the economic downturn.  

One of the most cost-heavy aspects of a business is equipment. Without this vital element, however, there is, unfortunately, no business and no operation. We thought we would unpack a possible solution to get you back into action: construction equipment financing. We took a look at what your options are and why it could be incredibly beneficial to your business. Let’s jump straight in.

What is Equipment Financing?  

Equipment financing, especially construction equipment financing, refers to the types of businesses that provide construction companies with the needed capital to purchase the necessary equipment to keep their business running. 

You can opt to go through a bank, a financial institution, or directly from an equipment company that will lease equipment to you. Leases are one of the most popular types of financing options as they provide the company with flexible and realistic options to acquire the equipment needed. 

Construction companies, in particular, choose to finance the heavy machinery and tools, as well as the trucking and vehicles needed to complete projects. They can also take out operating leases for the much-needed office equipment like computers and printers to run the admin side of the business. 

So, what are the benefits of financing equipment, and why would a company opt for this option, even if they have the capital available to buy equipment cash? We broke down the top reasons why financing, especially leasing, is incredibly beneficial to a company and why we recommend this option for business continuity. 

Leasing Preserves Your Working Capital

The first, very crucial aspect of financing and leasing is the fact that you do not need to set aside a huge lump sum of money to acquire the equipment that you need. The total cost of the equipment is broken down into manageable, monthly payments for the company to pay off. 

Naturally, interest and associated fees are added to the total cost, but it makes owning the equipment a lot more achievable. 

It is highly recommended by financial advisors not to take big chunks out of your working capital for things like equipment. This capital is needed for the day-to-day expenses of the organization like wages and rent. Should the company be hit with a sudden, and unexpected downturn, like COVID-19, for example, this available cash could be the saving grace to keeping the company running. 

Lease payments can be financially matched to the equipment’s productivity and financially speaking, offer less of a risk to the company. 

Equipment Redundancy is Not a Factor

We can all agree that technology is evolving at a very rapid rate. Equipment that has been purchased two years ago might not be relevant or might already be outdated. Take a look at laptops, cell phones, and printers, for instance. This type of equipment has short life-cycles and will need to be replaced often for staff to remain productive and be able to keep up with technological developments. 

Construction equipment is changing all the time. Tools are becoming smarter and making sure that the project can be completed with more accuracy, more efficiently, effectively and in less time with up-to-date equipment. 

Not only can equipment become obsolete after a few years but companies can maintain their competitive advantage over other companies with the latest equipment. Many of them boast the latest tools and technology as a sales point to win over customers. 

It is important, however, to know the difference in leases. Capital leases usually result in the company taking over the equipment and owning it at the end of the term. Operating leases, on the other hand, are the forms of financing where you can choose to return the equipment, lease a newer model, or re-lease the equipment for another period of time. 

It Makes Sense On Your Books 

Financially speaking, leasing is completely advantageous for a business. Leases are not recorded like normal equipment purchases and do not really impact the companies balance sheet, which is especially true in the case of operating leases. Because the company will be giving the equipment back to the lessor at the end of the term, the lease is recorded as a working expense and the company does not need to report the depreciation of the equipment. 

In the case of owning equipment, it would be listed as a depreciating asset and is listed on the balance sheet at its historical cost amount. This is then reduced by accumulated depreciation to result in the net book value. Should the company choose to sell the equipment, it triggers a gain or a loss, depending on the difference between the equipment’s net book value and its sale price.

Leases, on the other hand, are recorded as liabilities and open the company up for more lines of credit from banks as well as investments. Because they present less of a risk than owning assets and are reduced monthly expenses, the lessee can seek other forms of financing without too much trouble. 

Day-to-Day Equipment Management Is Reduced

When purchasing equipment, you take on all responsibility for the equipment. You will need to take care of the day-to-day maintenance and servicing of the equipment as well as ensure that the equipment is insured. 

When you opt for the construction equipment financing option, those responsibilities are up to the owner of the equipment, the lessor. In most cases, regular maintenance and breakdown costs will be factored into the leasing amount and be a part of the monthly fee. But the lessor will need to take responsibility for it being completed. 

A number of other costs can also be factored into the leasing fee and will not need to be completed by the lessee. 

Training, for example, can be factored in. Should the staff of the lessee company need training on the equipment, this can be factored into the costs, and be done by the lessor. Other costs like transporting, installing, import fees, licensing, and legal fees will all be factored into the lease costs. 

There Are Great Tax Benefits

As with your financial statements, leasing has numerous tax benefits. In most cases with leases, because of how they are reported on financial statements, you can actually claim back a significant amount from tax. 

Lessees can firstly take advantage of capital allowances, but can also cover interest costs, client upgrades, reduce taxes on defaulting clients, and deduct maintenance costs. Even with the latest tightening of the leasing regulations in IFRS 16, lessees can actually walk away smiling. 

But, just what does this mean? First of all, capital allowances allow you to deduct a percentage of the costs of the equipment from your profits on an annual basis. Capital allowances are applied in most cases with the purchase and financing of equipment. However, it might not be relevant in the case of an operating lease, but more so for a capital lease. 

You can also claim back for interest paid on the equipment and in many cases, make back a substantial amount spent on the actual lease of the equipment. 

Leasing Options are Flexible and Are A Great Option for Startups

Equipment leases are actually incredibly easy to apply for. They usually take a few hours to a few days to apply and get approved for. In most cases, leasing companies lease their own equipment and use it as collateral in case of any defaulting. Even financing companies who assist in financing the leases consider the equipment capital and are more willing to offer finance solutions. 

This is therefore ideal for startups and new businesses, who are the most likely to need a lease to get the business started. Most leasing companies do not take the company’s credit history into consideration, especially if they are a new company. If the company is signing a capital lease, with intent to buy at the end of the term, the lease will most likely require a deposit, and the financing company might take the owners’ and directors’ credit histories into consideration. 

You can usually negotiate various terms of the lease like the duration, deposit, maintenance and residual value at the end of the term. You can also negotiate the interest rates in most cases, but make sure you speak to a tax consultant in order to find the right interest rate to write off to tax. 

Wrapping Up 


There are a number of companies who you can approach for construction equipment financing, so it is important to do your research before settling on one. Make sure they are reliable, transparent and have a good history with clients. A great financing company should act as your partner throughout the process. Make sure you book a consultation with the company and provide them with a breakdown of your financial history as well as goals and strategic directory. The right company will work hand-in-hand with you, considering trends and risks in the market to provide the right financial solution.

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Equipment

5 Reasons Why Companies Prefer Operating Leases

Dental Equipment
Operating lease is a form of financing offered to businesses that allows them to acquire necessary equipment without buying it.

Businesses today face a different set of challenges compared to businesses operating a few decades ago. Not only are they facing more competition, but they are operating in tumultuous economic conditions. This has been especially apparent in 2020 with the spread of the global pandemic around the world. COVID-19 has not only crippled millions of companies world-wide but has brought industries to their knees. 

Business continuity is extremely tough in this type of economic climate, with business expansion being even trickier for most companies. Equipment is vital for companies to function, however, it is incredibly expensive to acquire, repair, or replace. It can be extremely difficult for companies to get the right equipment to scale their business operations as well as remain ahead of the competition. 

Luckily for many businesses globally, equipment financing solutions can be offered to companies to assist with the acquisition of the equipment. Some of the most popular come in the form of leases. These are straightforward ways of acquiring the hard assets you need to continue your business operations. They are also very popular and useful for small businesses and start-ups. 

We took a look at leases, and in particular, operating leases, and unpacked why businesses prefer to choose them. So, if you are looking for a financing solution to suit your needs, here are five reasons to choose a lease. 

What is an Operating Lease?

An operating lease is a form of financing offered to businesses that allows them to acquire necessary equipment without buying it. The cost of the equipment is rather spread out and paid in monthly installments until the end of the term when the equipment is usually returned to the lessor. 

Companies can choose from a number of different leasing options, the two most popular being finance or capital leases, and the other being operating leases. Operating leases differ quite significantly from capital leases, and are usually used when the lessee is not interested in actually owning the equipment. 

Essentially, a capital lease will end in the lessee taking over the ownership of the equipment at the end of the term, after paying a residual sum. In an operating lease agreement, however, the lessee will either return or re-lease the equipment from the lessor, depending on what their specific needs are. 

Operating leases come with numerous benefits that organizations like to take advantage of. We took a look at why certain companies would opt for this type of lease over a capital lease and how it can work in their favor. 

Operating Leases Mitigate Equipment Redundancy 

Most operating leases are there for companies to make use of the latest products in equipment and technology but without the price tag. With technology evolving as quickly as it is, equipment can become redundant after only a few months to years, with new, more evolved versions being released. 

Businesses don’t really want to keep spending thousands on replacing equipment repeatedly over a number of years and opt for monthly payments on the latest technology. 

Let’s take a look at a practical example. Office equipment like printers and laptops is the kind of technology that you would sign an operating lease for. These usually age rapidly, with newer, more advanced versions being released annually or every two years. Lessees can sign for a duration of time that allows them to use the equipment for the greater part of the equipment’s useable lifecycle, and return it once a new and more updated version is released. 

This allows the company to remain competitive in the market. By being able to constantly update their equipment, they are able to make use of cutting edge technology in the field and keep their products and services updated. It also reduces the amount of equipment wastage and disposal by businesses. Leases allow equipment to be returned, usually to the manufacturer, and it can be recycled properly. 

Operating Leases Are Less Financially Risky

Businesses, especially small businesses, and startups benefit greatly from operating leases due to their low-risk impact on the organization. Without the leasing option, companies would have to delve into their working capital to purchase equipment, which is usually a large lump sum. 

Smart financial advisors usually guide businesses away from using working capital to make large purchases. These funds need to be used for day-to-day expenses like wages, rent, and operational costs. Should you dip into these funds, you could be putting your company at risk, especially hitting unexpected financial misfortunes. COVID-19 is a perfect example of this. The pandemic hit unexpecting companies, crippling their income. Companies need to rely on their working capital to be able to float the company during these times, but if you have allocated a large portion of this to equipment, you could find yourself in trouble. 

It is, therefore, more advisable to spread the costs of price-heavy equipment over a number of months that take the impact of the full expense at once. This will allow the business to continue to operate and expand while using the vital equipment. 

An Operating Lease is All-Encompassing 

The third reason why businesses prefer to sign an operating lease is due to the fact that all of the associated costs of equipment will be included in the lease. As an owner of the equipment, you are signing over the responsibility of the equipment solely onto you. 

Costs like maintenance, insurance, operating fees and, licenses, and associated travel is something that the owner will need to cover. In the case of an operating lease, the lessor will retain ownership rights of the equipment throughout the term and will be responsible for all costs that come with the equipment. These costs will simply be factored into the monthly lease fee, but it will be up to the lessor to determine these costs at the beginning of the term. 

Consider the case given earlier. Should a company be leasing a printer from a lessor, the lessor will be responsible for the regular maintenance and repair of the printer while it is in possession of the lessee. The lessor company will usually have specialist technicians to work on the equipment and will send them to complete the work on the equipment. 

In many cases, especially for highly technical equipment, the lessor will need to factor in training the lessee company on how to use the equipment. These costs will be included in the overall monthly leasing fee and continued support and troubleshooting are usually covered during the duration of the lease. 

It Makes Financial Sense

Financially, operating leases are great for the books, for future credit, and for future investment. It also has some great tax benefits for the company. 

Operating leases allow a company to make use of an asset, without the financial ramifications of it. Because the equipment will never be owned by the company, this will not be conveyed on the balance sheet. In most cases, when owning and using equipment, businesses need to report assets, liabilities, as well as the depreciation of the equipment. This is not the case when using an operating lease.

Much like rent, operating leases are considered expenses on the financial statements and are expensed on the income statement. This, in turn, impacts both the net income as well as the operating income. 

This, in turn, will impact how future creditors and investors view the company’s financial position. Due to the fact that the functional equipment is not listed as an asset, this will open up the company to future credit streams and financing due to the low risk of the company. Investors also respond well to leases on the financial statements. It shows that the company can live up to monthly financial obligations as well as continue business operations and expansion. 

Lastly, operating leases are great for tax benefits. Because an operating lease is considered tax-deductible as “ordinary and necessary” business expenses, it can be written off to tax. 

Because a lease is short term, it is not considered a debt, and because you don’t need to consider the depreciation of a lease, it is 100% tax-deductible. You will also be able to write off the interest of the lease as this is tax-deductible. 

In essence, you will be able to get most of your monthly payments back from taxes, so speak to a qualified and experienced tax practitioner to assist you with the process. They will be able to help you structure a deal that provides you with as much kickback as possible. 

Operating Leases Are Flexible and Easy to Acquire 

Operating leases are notoriously popular among small businesses due to the fact that they are simple, flexible and approval rates are incredibly high. 

In most cases, buying equipment for a start-up is not only difficult due to the fact that the costs are so high, but also due to the lack of credit history. Getting approved for an operating lease is a lot easier, and more lessors are open to new business due to the fact that they use the equipment as collateral. Should the lessee default on payments, the lessor will simply take back the equipment into their own possession, impose penalties and end the lease. 

Should the business not have a credit score, the lessee will also take the credit score of the owners into consideration, but this is not a frequent practice. Leasing companies prefer to partner with their clients, so should the company be high risk, various fees and potential penalties will be factored into the lease. 

Lessees also prefer operating leases due to their flexibility. It is commonplace for the lessee to be able to negotiate some of the terms and conditions of the lease. Whether it be duration, interest rate, associated costs, or even a deposit, lessors are usually eager to help finance the equipment. 

Leases are also usually easy to apply for and to be approved. The process is usually incredibly simple and approval takes from a few hours to a few days to process and go through. This means that companies can take delivery of their equipment swiftly and continue working as usual. 

Wrapping Up 

 In closing, we highly recommend operating leases should you be looking to build and grow your organization, especially if you are operating on a budget. Not only can it work out financially for you, but you can remain competitive, and continue scaling your business, even during a financial downturn. It is advisable to do thorough research on your financing company and shop around to find the one that fits your company’s unique needs. 

As mentioned previously, a good financing company will consider you a partner and will spend time getting to know your company, your needs, and your unique financial position. They should be in a position to have an insight into market trends and risks and will be able to advise you against possible pitfalls in leasing. Together with the financing company, and a great tax consultant, you should walk away with a lease agreement that fully benefits your company and helps you grow into the company you want it to be. 

Categories
Equipment

Finance Lease vs. Operating Lease: A Comprehensive Guideline

Business handshake

As a business owner, we are sure that the phrase “We need new equipment” must send you into a cold sweat. As much as equipment is vital to the company operations; whether it be replacing old, outdated equipment, or expanding your operations, equipment is expensive. 

Most companies, whether they have been around for years and have a solid place in the market, or whether they are a startup, will battle to cover the cash layout of a new piece of equipment. In fact, most financial advisors lean away from using the working capital of the organization for buying new equipment, and rather promote equipment financing. 

Bearing this in mind, we thought we would take a look at leasing and the intricacies of how this financing option could be beneficial to your company. We thought we would break down the two most common leases and map out their differences. So, if you have wondered the difference between finance leases vs. operating leases, read on. We unpacked the difference of terms, financing benefits, and how it can be used to benefit your company. Let’s start off with the main differences between the two leases and why a company would choose one over the other.

Definition of a Finance or Capital Lease

A finance lease is also known as a capital lease or $1 buy-out lease. It is an option for the company to lease a piece of equipment for the majority of its useful life with an intention of owning the equipment at the end of the term. 

These leases have a balloon or residual at the end of the term that will need to be paid out to the lessor for the lessee to take over title ownership of the equipment. 

This kind of lease is usually taken when the equipment that the company needs will not become obsolete over a period of time. With technology evolving as quickly as it is, the equipment can become redundant easily and will need to be replaced and upgraded over a period of time. In the case of a finance lease, this will not be a concern. Equipment acquired with a capital lease is expected to last a number of years, and way beyond the leasing period. 

Definition of an Operating Lease

An operating lease or Fair Market Value Lease is finance taken on equipment for a period of time less than its useful life. So, in the case of equipment that will need to be regularly upgraded and replaced, this is the type of lease that a company would sign for. 

The equipment can be acquired over the agreed-upon duration of the period and then either returned to the lessor for an upgrade or re-leased for another set period of time. This will reduce the risk of obsolete equipment being purchased for the company as there is no transfer of ownership. 

Not only does this allow more flexibility for the company to continually grow and expand, but it also reduces the risk of large sum payments on equipment that will only be used for a limited period of time. So, when you need to pick between a financing lease vs. an operating lease, you will need to work out how long the equipment will last. Will you need to continuously upgrade equipment, or can you eventually own it to use it for a number of years to come?

Finance Lease Vs. Operating Lease: The Terms of the Lease

The next thing we need to look at are the differences in terms of the lease. Most terms of leases will differ from lease to lease, especially depending on the equipment and needs involved. But there are some terms which are more likely to pop up in a financing lease and operating lease respectfully. 

The Residual or Balloon Amount 

A finance or capital lease will usually have a residual or balloon amount due at the end of the lease as the lessor will be taking over ownership of the equipment. 

The residual amount is usually calculated at the beginning of the term and is the estimated value of the equipment at the end of its lease term or useful life. When calculating the monthly payments due for the equipment, the lessor will take the residual amount of the equipment into consideration, where the residual value diminishes the longer the useful life or lease period of an asset is.

In the case of an operating lease, because the lessee won’t be taking over the equipment, there will be no residual at the end of the term, and they can decide whether they want to return the equipment, upgrade or re-lease it for another period of time. 

Running Costs and Administration

In the case of an operating lease, because the lessor fully owns the equipment, and the title will not be handed over to the lessee at any point, they will be fully responsible for the running costs. 

Maintenance, insurance, transportation and any other fees will be the responsibility of the lessor. These costs will usually be included in the total monthly payments but will be carried out by the lessor. In some cases, they will also include training in these costs. Should the lessee company’s staff need training on the equipment, the leasing company will be responsible to provide one and send technicians to regularly check up on the equipment. 

For a finance lease, on the other hand, the lessee is usually responsible for these costs. Service and maintenance plans can be worked out for a period of time, but after the lease comes to an end, the lessee will be fully responsible for servicing, repairs and maintenance costs. Should the lessee require any of the additions included to the lease, it will be added to the monthly fees and will be relevant for the stipulated time. 

Terms 

An operating lease will usually be around 12 to 60 months in duration, with the lease term being less than 75% of the estimated economic life of the equipment. That means that the total payment value made by the lessee over the term of the lease cannot exceed 75% of the total value of the equipment. 

On the other hand, a capital lease term will equal or exceed 75% of the asset’s estimated useful life. In terms of the present value of the equipment, it should equal or exceed 90% of the total original cost of the equipment in the case of a finance lease while the lease payment is less than 90% of the equipment’s fair market value in the case of the operating lease. 

Let’s Talk Accounting 

Now that we have dealt a bit with the finance aspect of the lease, let’s take a look at how they should be reported. 

Finance leases are considered as purchasing an asset and need to be recorded as such on the company’s books. A capital lease, due to the fact that the lessor will eventually own the equipment, will impact on companies’ financial statements, influencing interest expense, depreciation expense, assets, and liabilities.

Capital leases are counted as debt. They depreciate over time and incur interest expense. It is considered a loan (debt financing), and interest payments are expensed on the income statement. The present market value of the asset is included in the balance sheet under the assets side, while depreciation is charged on the income statement. The loan amount, on the other hand, which is the net present value of all future payments, is included under liabilities.

Operating leases are far simpler to deal with. Because the lessee will not be taking over ownership of the equipment, it will merely be considered as expenses in the books. This is rather a contract that allows for the use of the equipment for a period of time but does not convey any ownership rights of the asset.

Operating leases are also known as off-balance sheet financing which essentially means that the leased equipment and associated liabilities of future rent payments are not included on a company’s balance sheet. The company will also not consider the depreciation of the equipment. 

This will mean that the company is still open for lines of credit and will be more attractive to investors due to the fact that money is not tied up in the equipment. 

Wrapping Up 

Based on all of this, you might be wondering which lease is better for your company. The answer lies in what your specific needs are and what equipment you will be needing for your company. An operating lease is financially less risky for your company and is perfect for equipment that will need to be handed back and upgraded over a period of time. A finance or capital lease, on the other hand, is more suited for the equipment that you would like to own at the end of the term, but cannot afford to purchase in a lump sum. 
It is important to ensure that you have the right financing company on your side when you decide to sign a lease. Not only do they need to be credible and reliable, but they should take your needs and economic trends into consideration when advising you on the lease. So, shop around, and do some homework on various financing companies and find one that will help you tailor a specific package especially for your needs.

Categories
Equipment

7 Ways to Negotiate the Best Leasing Rates for Your Equipment

Business meeting for best leasing rate

As a business owner, you will always be looking for the most profitable financial options for your company. Whether it be landing an investment to grow your business, or hiring new staff to service more clients, financial decisions need to be seriously considered. 

The acquisition of new equipment is just one of these decisions that need to be carefully mapped out and aligned with the strategic trajectory of the company. Equipment is an essential element of the day-to-day operations and can ensure that the business not only continues functioning but can also expand too.

But equipment can be incredibly expensive and be a burden to the company, especially if it is a start-up company. Financial advisors usually advise companies not to make use of their working capital to make large equipment purchases, and rather look into financing options to acquire new equipment. Working capital should rather be used for the day-to-day working expenses and operational costs of the business. Wages, rent and day-to-day bills should come out of the working capital, while equipment could be better acquired with an option like leasing.

Leasing offers you an affordable option to spread a huge equipment finance cost over a number of months. Luckily, most financing companies are open to negotiation; you just need to know how. We took a closer look at leasing, and how you can negotiate the best leasing rates for your company.

Do Your Homework

The first thing that you need to do is ascertain everything you need to know about the equipment. Find out what the fair market value is and how much it would cost you if you bought it cash. Shop around with various suppliers and dealers and ascertain how much it would be brand new, or what used equipment would cost. 

Then start looking at other associated costs of the equipment. How much would it cost to insure the equipment? How regularly would you need to maintain it, how much are these costs and where can you get it maintained? What about delivery and set-up fees? In many cases, especially for large equipment, you will need to have it transported to your premises and have specific equipment to help you do this. Do you need a permit or license for the equipment, and does your staff need to be trained in how to operate it?  

These are all costs, that if you buy the equipment to own, you will need to absorb. However, if you lease it, in many cases, the lessor will include these costs in the monthly leasing rates, and you will only need to pay the agreed-upon monthly lease. Operating leases, for example, will cover most of these expenses. Capital leases, on the other hand, usually result in the lessee owning the equipment at the end of the term, so they might need to cover these costs.

But, spend some time working out what would be a fair amount to pay monthly and set your spending limit.

Work Out Your Budget

The next thing to look at is how much you can afford to comfortably pay per month for equipment. It is advisable to work together with an experienced accountant and tax consultant to get as much as you can out of a lease. 

There will be a few things you will need to consider when budgeting for a lease, apart from the simple monthly payments. Should you be signing a capital lease, for example, you will in certain cases, need to pay a deposit for the equipment. 

If you intend on owning the equipment at the end of the term, you will most likely need to have a residual amount, or buy-out figure ready to take over ownership of the equipment. Make sure to get in writing what the buyout structure is on the lease. The most common lease buyouts are $1.00 purchase option and 10% purchase option. Have this factored in when you go into the lease to start with. 

The next thing to consider is your interest rate and APR. These can usually be negotiated depending on the length of time that your company has been in business. Start-ups and newer companies are usually considered higher risks and will incur higher interest rates compared to financially stable companies. But go into the negotiation with lower interest rates in mind, with backup why your company could be a lower risk. 

Lastly, take an early termination fee into consideration. Most leases are non-cancellable, and should you wish to end it early, you will most like incur a penalty fee. If you believe that you might end the contract early, raise it at the beginning of the lease and agree on your termination amount in advance. 

Take Tax Deductions Into Consideration 

From an accounting perspective, leases can be incredibly advantageous for your company. Most leases, especially operating leases, will be reported as expenses on the balance sheet and not be listed as a depreciating asset as it would be if you bought it. This means that you will still have the opportunity for lines of other credit and higher investment potential. Capital leases are usually listed as a liability, however, they are considered operating costs, and are highly tax-deductible. 

Should you work closely with an experienced tax practitioner, you can have a large portion of the costs of the equipment and interest written off. This means that you could be paying even less for your equipment.

Working together with your tax practitioner prior to signing a lease will allow you to structure leasing rates that benefit your company, so take some time to work out the intricate details of your tax rebates.

Know Your Credit Score

The next thing you need to know is where you stand financially. If you have no credit score or a bad credit score, acquiring financing on your equipment can be incredibly difficult. Most financing houses consider a bad credit score as high risk and will usually decline any financing applications. 

With leasing, however, companies are usually more prone to providing leases to companies. In the case of a lease, the equipment is held as collateral as it still belongs to the lessor, so, should the lessee default on payments, the lessor can simply take back the equipment. Applications for leases are usually a simple process and involve a lot less documentation than other financing options.

This works in favor of start-ups, who usually have little to no credit score. Leasing companies are usually a lot more open to leasing equipment to start-ups, as they can have more say in the terms and interest rates. They are also likely to take the credit score of the business owners into consideration for the lease, so if you have that option, use that to your advantage. 

If your company has a great credit score, it lowers the risk to the lessor. So, you can negotiate lower interest rates and better terms on the lease. As less of a risk, and with the leasing company wanting to assist with financing, you can negotiate more benefits in the lease. Added costs like insurance or maintenance could be included in the monthly payment, or a lower administrative fee could make a huge difference in the overall monthly payments. 

Shop Around For the Best Financing Company 

In addition to doing research on your equipment and knowing what your capabilities are, spend some time doing due diligence on the leasing company. You will need to find one that is reliable, transparent, and communicative. It will also be to your benefit to find a company that will spend time getting to know your company and its needs. 

A great financing company will understand market movements and trends in the industry and be able to structure tailor-made leasing rates for your company. Shopping around will also mean that you can get the best deal and have an average ballpark figure of what you will be paying monthly. Keep in mind though, the cheapest offer usually has some hidden clauses and fees that you might not see from the outset. So, make sure you know all of the terms and clauses before simply settling on a company. 

It will also be to your advantage to let the companies know that you are shopping around. It will create a bit of leverage for you to be able to negotiate better terms and payment options if you have various offers. If you have a preferred company, use the other offers to try and drop the monthly payment rates, and be open about your needs and expectations. 

Consider the Terms of the Lease

The last thing to consider before jumping into the lease is all of the terms of the contract. Each element needs to be carefully considered, from the duration of the lease to the cancellation provisions. 

Let’s take a look at the duration of the lease, for example. If you are acquiring equipment that has a lifespan of a few years, and that will need to be replaced and upgraded after a while, you do not want to be stuck in a lease with equipment that is redundant and outdated. When you conduct your initial research into the equipment, make sure you ascertain what the lifetime of the equipment is. 

Consider the cancellation fees too. You might find yourself in a position halfway through the lease where you can no longer afford the leasing rate or will need something else entirely. Business evolves rapidly and your needs might change after a few months or years. Take the COVID-19 pandemic, for example. Thousands of businesses had to suddenly evolve themselves to remain competitive and were stuck in financial obligations that they could not get out of. 

Lastly, if you are signing an operating lease, spend some time negotiating the renewal options at the end of the term. You might need to upgrade the equipment or even re-lease the same equipment. You want to do so at a reasonable cost and not pay more for the equipment, so try and include this in your lease. If you are savvy about your negotiating skills, you can factor an upgrade into the lease at the same, or even lower monthly installments. 

Up Your Negotiating Skills

Now that you have everything lined up, with the right deal in mind, it’s time to negotiate with your chosen financing company. Try and have your attorney and accountant or tax consultant present during the process to ensure you are getting the best deal that you can. 

It is important to know the basic rules of negotiation. 

  • Know when to walk away from the negotiating table;
  • Remove any emotion from the negotiation; 
  • Aim for a win-win scenario;
  • Consider the other parties objectives and work with those to get to an agreement; 
  • Prepare in advance, have your key objectives ready and know what you are wanting out of the deal; 
  • Never accept the first offer; 
  • Be honest and transparent at all times;
  • Be friendly and open to the other parties communication;
  • Understand the rules and structure of a negotiation;
  • As much as you need to be friendly and understand the other party’s perspective, remember that they are also looking to benefit from this, so hold your ground. 

Wrapping Up 

Keep in mind that most leasing companies do in fact want your business and are open to negotiating the leasing rate. As mentioned earlier, it is important to shop around for the right company to partner up with. You will want a company on your side that will be able to work with you to land the right lease. If you are unsure about a company, do some internet research into them and check their social media reviews. Usually, customers will leave comments about their experiences with the company on their Facebook profiles, so take this into consideration when making your selection. Reputable companies are also somewhat easy to spot on the internet, so once you have made your selection and signed the lease, you can finally settle back with your new equipment and start growing your company. 

Categories
Equipment

Truck Financing: 4 Essential Things You Need To Know

The transportation industry can be an incredibly lucrative business to get into, especially for new entrepreneurs. It is an indispensable economic activity, that even with the evolution of technology, and growth of digital dominance, we cannot do without. 

Freight and logistics still make up the largest portion of the transportation industry, with 35% of the full transportation market share belonging to trucking. 

Despite the return of the logistics industry being high, starting out a new business comes with its challenges. High competition rates have been flagged as one of the biggest setbacks of starting a freight company, while the second biggest challenge is the high start-up costs. 

The costs of the trucks, trailers, and flatbeds are phenomenal and without large working capital, it could be daunting for business owners. 

There are, however, various options available to companies for them to acquire the much-needed equipment they need to run a successful business, without putting down a huge cash payment. We took a look at the world of truck financing, and how you could take advantage of it to launch, manage, and grow a successful trucking empire. 

Know What Your Options Are

When entering the world of fleet and trucking, the first thing you will need to consider is what finance options you have available to you. In most cases, companies do not have the initial working capital to simply purchase trucks or fleets of trucks. 

Even if you do have a lump sum available to you, it’s more advisable to rather keep that working capital for day-to-day operations like wages, rent, and in case of economic downturns. 

Financing can assist you in acquiring the equipment you need to get your fleet on the road with little initial output and to start growing your business relatively quickly. You will rather be paying a monthly installment over a set period of time. 

There are a few financing options available for you to consider. 

Loans 

Let’s start off with loans. You can choose to acquire a loan directly from the dealer that you are purchasing the truck from, through a bank, or a reputable financing house. A loan should be considered when you want to own the equipment at the end of the term and is ideal for something that will hold its value long beyond the actual term. So, for something that depreciates very quickly, this might not be your best option. 

The other thing you will need to consider about a lease is that the interest is amortized throughout the term. That means that you’re paying more interest at the beginning and more principal at the end.

Leases

A lease is ideal for something that does depreciate quickly and that will not be worth the full value at the end of the term. If you are looking for equipment that you will need to upgrade at the end of the term, this is the option for you. 

There are also two primary types of leases that you need to be aware of. One is a capital or $1 Buyout lease, which allows you to take over ownership at the end of the term. The other is an operating lease which states that you will either have to return the equipment at the end of the term or re-lease it if you need it for a longer period. 

Leases offer fixed finance charges that are factored into the monthly payment and will not waiver over the period of the lease. Part of the fixed monthly payments are soft costs like maintenance, insurance, installation, and training if it is required. 

They are non-cancelable and the equipment being leased, like the truck, is held as collateral in case of default, and can be collected by the lessor in such a case. 

What You Need For Your Business

Now that you know what financing options you have available to you, the next thing you need to look at is what your business actually requires. We highly advise that you set your short-term and long term goals, and create a blueprint for the strategic direction of your business. 

You will need to consider the types of trucks you will need for your business. Are you looking to have a full fleet? Do you want delivery trucks, flatbed trailers or custom dry-vans? Or are you looking more at the construction side and looking for dump trucks and transfer trailers? Having this in place will help you with your application for financing. 

The next thing to consider is your budget. Even though you will be spreading the costs out over a number of months, you will need to factor that into your monthly operating costs. If you are taking a capital lease, you will also need to budget for the residual cost at the end of the term if you want to actually own the trucks.

The last thing you will need to consider are the companies who will be financing your trucks. You will need a company that not only has a good reputation, and who is trustworthy, but a company that will work with your specific needs. Keep in mind that each company has a unique set of needs, and you will be partnering up with this company. If they can assist and guide you through the process, highlighting risks, you will be able to benefit from the financial partnership. 

What is Needed of You for the Financing Company

The next thing to look at is what you will need to prepare for the financing. The first thing that you will need to consider is your credit score. In many cases, especially with a new start-up company that has not had lines of credit, a credit score does not exist for it. 

In these cases, a financing company may take the owner’s credit score into consideration, however, in most cases, leasing may be a good option for new companies. Most lessors, due to the fact that they are using the equipment as collateral, are more open to providing a lease to a company with no credit score. 

If your company has a bad credit score, it is highly advisable to disclose that at the early stages of the application. There are a number of online lenders and companies who will be able to assist you with financing, despite a bad credit score. In these cases, you might find yourself paying a bit more interest and fees. This could work out for you in the long run as you can keep your fleet on the road and keep income coming in to rectify your credit history.

Make sure you know exactly what documentation you will need for the application. In some cases like loans and capital leases, you will need to have the insurance instated prior to taking the truck over. You will also need to have all of the details of the truck in your possession for legal purposes. 

Lastly, if a downpayment is needed for the contract, ensure that you have that ready when you sign for the truck. Without that, you will not be able to drive it off the lot. 

How Will It Impact You Financially?

One of the most important aspects to consider about taking trucking finance is what impact it will have on your finances. How will it be recorded on your balance sheet? Are there any tax benefits? Will you be able to get more credit with the current finance. 

Let’s take a look at a lease first. A lease has several benefits to an organization due to how it is recorded. Keep in mind that an operating lease and capital lease are different, but primarily, the lease is seen as an operating cost to the company and is listed as an expense. It is usually also listed as a liability due to the fact that it is depreciating, but the depreciating cost is not taken into consideration. 

There are also incredible tax benefits for a lease. If you work it correctly, you can write off all interest on a lease to tax, and in some cases, if you hire a great tax consultant, a lot of the costs of the lease too. In essence, you can actually make up for a lot of the costs spent on the lease. 

Because this lease is also seen as an expense, it opens up other lines of credit for you with other lenders and banks. A loan, on the other hand, ties up that credit line and is limiting for more borrowing and investment. It is more of a financial risk to your company because it will not provide as many tax benefits as a lease would. 

Wrapping Up 

In order to decide what kind of financing to sign for, ask yourself these questions: How long will you need a specific truck for? Will you need to upgrade it in a few years? How much cash do you have for an upfront deposit, if any? A trucking lease will allow you to invest much-needed cash and credit into other areas of their business. It will also guarantee you a flat rate and a consistent interest rate with no down payment needed. Lastly, when you need to upgrade, a lease will make it easy for you to move on to less obsolete equipment and ensure a top-of-the-line fleet for your company. 

Categories
Equipment

Top 8 Advantages Leasing Will Have on Your Company

If you are a business owner, you will know that one of the biggest expenses in the company is your equipment. Whether you are a start-up company or a corporate giant, the fact is that equipment takes a large chunk out of your working cash flow each and every month. Together with rent and wages, equipment falls under the top three most crucial expenses in a business. 

In saying that, equipment, like the labor and property, is one of the most crucial to keep the business running. If you are in hospitality, you will need vital kitchen equipment like fridges, grills, and ovens. Industrial plants and manufacturing businesses spend millions on equipment every year to produce their products. Even offices and technology hubs need vital equipment like laptops and printers to run. 

Buying this equipment outright is usually unattainable for most companies. Even in cases where there is a large enough cash flow to make a large one-off purchase, it is usually in the company’s interest to rather make use of financing options like leasing. So, we took a look at leasing and how can benefit a business. Below are the top seven advantages that leasing will have on the financial stability of your business. 

It Encourages Business Growth With Reduced Risk 

As mentioned, your business needs critical equipment to function, but this equipment can come with a massive price tag. Leasing mitigates the risk of a large upfront payment that will put a lot of pressure on your business. 

When you make a large purchase, you do so with your working cash flow. This is where your monthly expenses like wages, rent, and other monthly expenses come from. By taking a large chunk out of that, you might be putting the rest of your monthly expenses at risk. 

Consider the impact that COVID-19 had on businesses, for example. Both small and large businesses alike were impacted by the pandemic that spread across the world. Cash flows received a direct hit and most companies were taken completely by surprise by the sudden drop in monthly income. This, together with new equipment purchases could cripple a business, so it is usually more advisable to reduce that risk and spread the cost of vital equipment over a period of time. 

It Increases Your Purchasing Power

Apart from reducing the risk to your working cash flow, and monthly expenses, leasing is also incredibly attractive to other creditors and investors too. Leasing provides companies with a credit history, and the more regular and on-time monthly payments reflect on the books, the more stable the company looks to other creditors. 

Leases are also recorded differently compared to bought equipment and make for attractive figures when the books are examined by third parties. 

In essence, you can choose from a number of different leases, the two primary being operating and capital leases. Capital leases usually result in the lessee taking over ownership of the equipment, while operating leases allow the lessee to choose whether to return it or re-lease it after the period of time. 

Both of these will be recorded differently on the balance sheet. Capital leases, because you will eventually own it, are recorded as a liability but the market value of the equipment will be recorded on the balance sheet as an asset.

An operating lease, on the other hand, is recorded as an expense on the balance sheet. It won’t need to be considered a debt and the depreciation of the equipment won’t need to be recorded at all. This will indicate to a third party that you have working capital available to make use of on a month-to-month basis. They will also see bought equipment as a depreciating asset, and when it comes to operating leases, you remove that risk entirely. 

A Lease Is Entirely Financed

One of the biggest differences in signing a lease, especially an operating lease, compared to buying equipment is that the lease encompasses everything related to the equipment. When you purchase equipment straight up, your ownership of it means that you are fully responsible for everything about that piece of equipment. 

In the case of a lease, the lessor, who is still the owner of the equipment, is responsible for the aspects such as maintenance and insurance of the equipment. This means less monthly and annual expenses that you need to worry about.

If you negotiate correctly with the financing company,  you can also have various other equipment-related expenses factored into the lease. Installation costs, freight and transport costs, service contracts, training costs, and sales taxes can all be incorporated into the lease if you negotiate correctly. 

Leasing Allows You To Stay Up To Date

Technology is constantly evolving. Every few months there seems to be an upgrade to some pricey equipment, making the former somewhat obsolete. Leasing reduces the risk of buying vital equipment, that in a few months, will be replaced with something more advanced and fresher. 

If you look at laptops, or mobile phones in an office environment, for example. Making a mass purchase of this kind of equipment will seem futile for your company, as in two years, there will be new technology out which will make communication and operating so much easier. 

Leasing, therefore, eliminates obsolescence. You have the flexibility of acquiring new equipment that is vital for your day-to-day operations, and after a few years, swapping it out for something more advanced without any risk to your business. You can choose to keep leasing or sign a new lease with the new equipment. 

Upgrading, especially with an operating lease is simple to do. Once you have completed the term with the lessor, you are able to re-negotiate terms for new equipment or to have the current equipment upgraded according to your needs. Keep in mind too, if its equipment that requires regular upgrades during the course of the lease, you can negotiate this into the contract. 

It Has Great Tax Benefits

Apart from the fact that you can spread out payments for critical equipment over a duration of months, one of the top advantages of leasing are the tax benefits. In order to get the most out of your lease, speak to a knowledgeable tax consultant who will be able to assist you with reporting it correctly, and ensure that you are positioned in such a way that you get as much back from the lease as possible. 

Lease payments are, in most cases, considered tax-deductible as “ordinary and necessary” business expenses. If you sign an operating lease, from a financial reporting perspective, it will show up as a liability. But is also listed as an operating expense, as mentioned, and the payments themselves are considered necessary for business operations and can be written off. 

In these cases, the short term of the lease means that it will not be considered a debt and you will not need to record the depreciation of the asset. These payments are usually 100% tax-deductible, which means that you end up paying even less at the end of the day on the equipment. 

You will also be able to write off the interest of the lease as this is tax deductible. So, in the long run, you can actually make a lot back from leasing equipment by tax write-offs, and pay less for equipment that you really need. 

Leasing Hedges Against Inflation 

The option of leasing also allows for the lessee to be guaranteed equipment for a period of time at a set cost. You will not, unless you default on payments, lose the equipment, and you are not at risk of paying more for the equipment based on economic fluctuations. 

This is a clear strong advantage as rising and falling interest rates can impact installments on certain financing options, but in the case of leasing, these are determined at the outset of the lease. 

The other advantage lies in the fact that the lease amount is agreed at today’s cost of the equipment. Your monthly expense for the equipment, for the remainder of the term, comes out of tomorrow’s inflated dollar price, so you, in the long run, will be benefiting financially from signing a lease just the right time to get as much as you can out of the equipment. As they say, get more bang for your buck! 

Leasing Is Convenient and Easy to Acquire 

One of the aspects of leasing which is incredibly attractive to companies, especially start-ups, is that it is an incredibly simple, convenient process. Finance houses usually lease out their own equipment to companies and use that equipment as collateral. A lease can be canceled at any time, should the lessee no longer be able to afford the monthly installments, which means that the lessor can simply take back the equipment. 

The process of signing for a lease is also much simpler than making an outright purchase or renting. In most cases, new start-ups do not have any credit history, and this may count against them when it comes to financing. In the case of leasing, finance companies will consider the company, and also take the owner’s personal credit history into consideration when agreeing to a lease. 

The leasing process is also usually straightforward and swift. Many leases can be initiated online, should the finance company offer those facilities. They will also be somewhat quick to turn-over and you will usually not have to wait more than 72 hours to find out whether you have been approved or not. 

It Allows For Great Flexibility For Both Lessor and Lessee

Leasing terms can also be incredibly flexible if you negotiate them correctly from the outset. You will be able to negotiate various clauses and terms on the lease like the duration of the lease, interest rates, and monthly payments. 

It is important to consider your monthly repayments when signing a lease. In order to get the most out of the lease as possible, you will need to know the average cost of the equipment, and what kind of lease you are signing for. This will help you determine whether you are paying a fair installment on the equipment. The rule of thumb is as follows: 

  • For a capital lease; the lease term should cover the majority of the equipment’s remaining economic life. This is considered to be 75% or more of the remaining economic life. So, if you are going to be purchasing the equipment at the end of the term, the sum of all the installments should not be more than 75% of the value of the equipment. When you add the residual payment to the total of all the lease payments made, they should match, the fair value of the underlying asset.
  • In the case of an operating lease, the sum of all lease payments should not exceed 90% of the equipment’s fair market value. 

As mentioned previously, aspects such as maintenance and insurance responsibilities can also be determined prior to signing, and should you be signing a capital lease, this will be transferred to you once the lease has come to an end. 

Wrapping Up 

Once you have gone through the decision-making process of signing a lease, one of the vital things to consider is the company that will be financing your lease. You will need to ensure that you choose a company that is not only reputable but will take your needs into consideration. 

By conducting research at the beginning of the process, you will be able to establish your risk appetite, as well as reduce the risk to your company by knowing the ins and outs of the agreement you are signing. 

Make sure, at all times, that you have done enough research into the company too as this will reduce any risk to your company. Spend some time in getting to know the company and what they have to offer. Find out if they are open to negotiating terms, and what benefits they can offer when you lease with them.