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.
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.