Equipment leasing is when a business uses a piece of equipment owned by a leasing company for a set period of time at a set price. The lease can allow for the business to purchase the piece of equipment at the end of the term or upgrade to a new piece of equipment. Equipment leasing works for all types of businesses, including agricultural and farm, computers and telecommunications, medical and health care, office, church and non-profit, educational, environmental, and pharmaceutical.
To help demystify equipment leasing we would like to provide you with answers to commonly asked questions.
Q: What types of equipment can I lease?
A: A vast range of equipment can be leased for all types of businesses; including agricultural and farm, computers and telecommunications, medical and health care, office, church and non-profit, educational, environmental, and pharmaceutical.
Q: What types of leases are available?
A: Your most common lease options are a Capital Lease/Finance Lease, Master Lease, Operating Lease/True Lease, Progress Funding and Sale–Leasebacks.
Q: How are lease rates determined?
A: Lease rates will depend on your credit history, the cost of equipment and the term structure you want. In addition, rates are fixed and can also be paid off at any time.
Q: What is an LOI?
A: A letter of intent (LOI) will define the terms of the lease transaction with items such as; monthly payment, equipment cost, lease rate factor and length of the transaction.
Q: What is progress funding, and how can it help me?
A: Progress funding is a great option and added service to an equipment lease transaction. Once your equipment lease approval is obtained, you will have the option of funding deposits or invoices as the equipment is being ordered, delivered and/or installed. Instead of paying for equipment that is not in place you will only be paying for the portion of the equipment that is in place. Once all of the equipment is accepted as delivered, installed and working, the equipment lease term will commence for the full payment as agreed.
Q: What is different about leasing vs. paying cash?
A: Leasing allows your company to make payments in smaller installments, as opposed to making one significantly higher payment for the same equipment if you were to pay cash. Leasing allows you several tax deductions for your business as well under Section 179.
Q: What is different about leasing and obtaining a bank loan?
A: Getting approved for a bank loan can take weeks, even when you need capital right away. Plus, most bank loans involve lengthy applications and businesses need to provide large down payments and collateral. With equipment leasing, the application is only one page, and businesses can receive equipment without providing a financial statement or extensive collateral. Equipment leasing also allows for faster funding.
Q: When will the vendor be paid?
A: Once all documents are signed and received, funds are often released within 24 hours.
Q: What type of credit score do I need to obtain an equipment lease?
A: A credit score of 650 and above is important in order to gain financing with many equipment leasing companies.
Q: Do leasing companies pull a credit report when I apply for equipment financing?
A: Yes. Although, all leasing companies must get your approval to do so first.
Q: How old does my business need to be to qualify for equipment leasing services?
A: Businesses that have been established for at least 3–5 years are preferred; however, some leasing companies are able to provide equipment leasing for companies such as start-ups.
Q: Can equipment leasing companies pay down payments on my invoices?
A: Yes, they can pay a down-payment portion of an invoice on a partial acceptance. This is when progress funding will come into place.
Q: What do you need to set up an equipment lease?
A: First you need to submit a request to the leasing company. Then the leasing company will go over your financial package and structure your deal. Once that is complete you will receive a letter of intent outlining the terms of the equipment lease. Then you enter the final approval process where you will review, prepare and sign documentation. Once that is complete the funds will be released.
Q: What are security enhancements?
A: Security enhancements are, in part, steps taken by a leasing company to limit risk and strengthen the transaction. These steps may include one or more of the following enhancements; a security deposit, for which customers provide a deposit that is held in a CD to secure the lease, a letter of credit from an approved bank, free and clear additional collateral owned by the company, and/or free and clear real estate.
Q: What are my options when my equipment lease term is up?
A: At the end of your equipment lease, you have the option of purchasing the equipment, returning it, and/or extending your lease period.
Q: Are lease payments eligible for a tax write-off?
A: Leasing gives your company the opportunity to deduct your payments from your taxable income. Typically, the IRS will allow you to write-off up to 100% of your lease payments on a True or FMV lease. Simply consult your tax professional, as every business is different.