By Michael Lockwood, President of TEQlease Capital
While startups and new businesses may already realize the many benefits of leasing their equipment, including conserving their cash and significant tax benefits, they also need to carefully research their equipment financing needs before signing the dotted line. Startups and new businesses should consider the following tips to make sure that they don’t make any costly mistakes.
- Understand your business credit and organize your financial information before contacting an equipment lease financing provider.
- Don’t assume your bank or the equipment manufacturer’s captive finance company will offer the best terms. The majority of equipment leases are done by equipment lease providers. Always compare rates, lease terms, fees and options.
- Do due diligence on your proposed financing provider. Once you have a short list of providers make sure to check them out thoroughly. Go to Google and run a search on them. Also run a search on social media sites like Twitter. Work only with established financial solution providers.
- Don’t pay upfront “application” fees to an equipment financing provider.
- Be prepared to explain in advance any negative business results to a lease financing provider. For example, if you had a business loss in 2010 explain why.
- Do the math and determine whether the Section 179 deduction and bonus depreciation will benefit your business or not. Section 179 allows businesses to deduct the cost of qualifying businesses equipment placed in service in 2012 up to $125,000. In 2013, the deduction will drop significantly to just $25,000 unless Congress acts.
- Understand the difference between a Fair Market Value Lease and a $1 Purchase Option Lease. A Fair Market Value (FMV) Lease is one of the most common leases that businesses select because it offers the lowest monthly payments, provides the greatest flexibility at the end of the lease, and may also provide tax incentives. A FMV lease is often used for acquiring technology equipment.On the other hand, a $1 Purchase Option Lease gives businesses the ability to “purchase” equipment for a $1 at the end of a leasing period. The monthly payments are higher than a FMV lease. In addition, you may also have additional financial benefits including depreciation and interest expense benefits for tax purposes.
- Describe to the equipment lease financing provider how the equipment acquisition will benefit your business. Provide a projection of cost savings or incremental realizable margins.
- Consider bundling multiple equipment acquisitions from different vendors under one lease with an independent commercial equipment lessor. Rates tend to be higher for smaller transactions. Bundling equipment acquisitions generally results in lower rates, and also minimizes processing fees.
- Ask your equipment vendor for payment terms so you can defer a portion of the equipment cost, and coordinate deposits, progress payments, and performance retention payments.
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