Equipment Leasing - Do's & Don'ts!

As a small business owner, you may be looking to start or grow your business by adding newer and better equipment.

Just as important as finding the right machine, finding the best financing is integral to the process and finding the right lender and finance program are keys to your success.

If you identify that equipment financing is a need for your business, versus paying cash or credit card to purchase equipment, then reviewing the DO’S and DON’TS of equipment leasing below may help you choose the right lending partner for your company!

DO consider working with a lender that is referred to you by the equipment supplier/manufacturer

In most cases, your equipment supplier has partnered with an equipment lender after a rigorous interview process along with completing numerous finance transactions with the lender.

If an equipment supplier is referring a lender, they realize their name is on the line and would not be referring the bank/leasing company if they did not have the upmost confidence in their interest rates, finance programs and customer service.

DON’T Stop There

In most cases the bank or leasing company referred to you will provide excellent rates/service, but it is in your best interest as the customer to seek out 1-2 additional finance quotes to get the best financing terms available to your company. Even if you prefer to work with the equipment supplier’s lending partner, secure additional finance quotes and if an outside lender offers better terms you can always go back to the original lender. Ask them to match or beat terms you have found elsewhere...Negotiate!

DO ask your equipment leasing provider/bank to offer rates and terms in “Plain English”

Equipment lease agreements are not contractually a loan and therefore an APR may not be listed on the contract. Even so, ask your leasing company to list the APR, deposit, fees and buyout clause in “Plain English” on an email or document for your review. If a lender is unwilling to complete this task, do not work with them. Work with a lender that is willing to disclose all costs and fees with clear communication.

DON’T assume a leasing company/bank is working in your best interest

Even if the lender you are working with appears professional and trustworthy, bear in mind it is a business transaction and therefore protect yourself.

When you receive the final contract to sign, read it and reread it. Then, send it to your lawyer and/or accountant to review as well. There may be fine print details such as interim rent expenses, payoff charges and end of lease fees that may not be clearly conveyed in your phone or email communication with your lender. The key is to understand the entire contract and not be blindsided after the deal is done.

DO leverage your equipment supplier relationship to find the best deal

If you are not happy with the finance or leasing options available from your lender and they were referred by your equipment supplier, let your equipment supplier hear about it.

In many cases the equipment supplier and lender work together, to facilitate transactions, and many times they may offer joint discounts in hopes of earning your business.

DON’T work with a lease or finance broker, unless you accept the cost of financing will be higher

There are many banks and direct lenders in the industry and therefore it is in your best interest to find a direct funding source.

Why pay a broker’s commission/fees which can increase your finance costs by 3% - 10%?

Save the money and work with a direct lender. If your equipment supplier does not work with a direct lending source, search online or seek referrals from other sources such as your local bank or business associates.

If you are a new business, DO expect higher finance charges

If you are less than 2 years in business, the reality is that banks and lenders view doing business with your company as a high risk endeavor.

Interest rates for a new company, depending on the owner’s personal credit, may range from 15% - 35%. This may seem outrageous, compared to a 5% APR home mortgage, but equipment depreciates rapidly and banks sometimes endure a 30%+ default rate on new business financing. The best perspective on new business financing is to focus on your ROI (return on investment) from the equipment. If the equipment you are acquiring will increase your company’s revenues by $10,000 a month and your lease payment is $1,000 a month, you are making a business decision that increases your monthly profits by $9,000. Even if the $1,000 lease payment equates to 35% interest, if you are $9,000 ahead each month it still may be an excellent business decision for your company.

DON’T assume your local bank is the best option for equipment financing

Most business owners initially shy away from equipment leasing companies, believing their local bank will offer more competitive financing.

In some cases this is true, but in most scenarios for newer companies a bank loan will not be a good option. Bank loans typically require additional liens on real estate/business assets or significant down payments/security deposits. Even if a bank offers a lower interest rate, usually there are covenants to the loan such as keeping thousands of dollars in a checking account. These types of requirements increase the true cost of borrowing and most bank loans take weeks to secure. An equipment lease, through a direct leasing provider, can be approved in 1-2 business days!

DO understand your lease structure and buyout

For most small business, the best equipment lease structure to secure is a capital lease with a fixed buyout option, such as a 10% buyout or $1.00 purchase option.

This lease structure is treated like a loan for tax purposes and gives you the opportunity to own the equipment at the end of the term.

Most equipment lease firms offer these types of programs. Read the fine print of your lease contract to make sure the end of lease options are clearly explained.

If you have a good experience with a lender, DO let your equipment suppliers and associates know about it!

Most leasing companies’ clientele are driven by referrals and repeat customers.

If you have a good experience with a leasing company/lender, let your equipment supplier and fellow business owner associates know about it!

The biggest compliment to a hard working equipment leasing professional is a positive referral.