Industrial Equipment Financing: What are your options?
This article is focused on the concept of financing heavy equipment in the small business environment. There are many sources for acquiring the capital equipment needed to expand or make your business more efficient. The use of an experienced equipment leasing broker is a great way to find a new small business finance source. The decision to lease industrial equipment is one of making the best use of your working capital – or even preserving the limited amount of working capital available to you.
Many times the results of the lease vs buy calculator show buying as the least expensive route to acquire new equipment. However, this calculation does not take into account the realities of lack of working capital and the need to expand your business to compete more effectively with the competition.
What is small business equipment leasing?
Typically an industrial equipment financing lease includes the following features:
- 100% financing of the purchase price
- Purchase price financed can also include; taxes, delivery and installation
- Many commercial leases also allow for third party maintenance contracts to be included in the payments
- Business tax advantages may be more attractive on leased equipment
- As a business asset finance the equipment lease is easier to qualify for with a much faster approval process than a business loan
For example, if you are a local commercial printing shop that wants to expand your business to a offer a binding service, but need industrial binding equipment that costs $20,000 installed.
What do you do? Pay cash for the equipment, try to get a commercial bank loan, or lease it? If the new equipment is going to increase sales then it makes sense to try to match the monthly equipment lease cost with the increased incremental business cash flow.
Many commercial lease commercial leasing companies can tailor the lease payment terms to better match the expected new sales cash flow. Like offer three months with no payments, or low toward full payments over a 6 month period.
Three types of business equipment leases.
- Fair Market Value Lease – The entrepreneur who selects this type of lease will have the option of returning the equipment at the end of the lease term or buying it from the lease company at fair market value. Additionally, a new lease can be negotiated on the now used industrial equipment. This is a good choice for equipment that depreciates rapidly in value.
- Dollar Buyout Lease also known as a Capital Lease. If you plan on keeping the equipment at the end of the lease term, a Capital Lease gives you the right to buy the equipment for only $1. Essentially, you have fully paid for the equipment with your lease payments. If you know you will still need the equipment and it will still be valuable then this may be your best choice.
- Sale Lease Back – In this situation your business already owns some valuable industrial equipment, and you would like to free up the working capital tied up in it’s purchase. The Sale Lease Back is where you sell the business equipment to the leasing company and then make lease payments to them for the length of the leasing agreement.
One thing all the industrial equipment financing companies will insist on is Business Equipment Insurance, with them specifically listed as the policy beneficiary.
Key factors to understand before signing an industrial equipment financing lease.
- Know you business goals regarding this piece of equipment. Are you adding a product line, becoming more efficient, or trying to keep up with the competition?
- Be sure you fully understand the piece of equipment you want. Is it a proven technology, will it do what you need to accomplish your business goal, do you have the staffing or training to properly operate it? Most Importantly, are you paying the right price for it considering both the capital cost and the long term lease payments?
- Understand the lease – Be sure to carefully read all the sections of the lease and consult with your small business lawyer before signing any financial agreements. Your business accountant can also be helpful in understanding the tax implications of the new industrial equipment financing.
If you already have equipment on lease consider asking your business equipment finance company about a ‘wrap lease’. In this case, you may be able to wrap together a new business equipment lease with an existing business equipment lease resulting in a new more favorable consolidated payment structure.
Some Companies to consider.
There are many banks and leasing companies to go to for a business equipment lease. If you are buying new industrial equipment then the manufacturer may have a leasing program to offer to you upon. Each company will have specific terms and provisions so be sure to compare carefully. Some companies will not work with newer businesses less than 1 year old. Others will have high minimum purchase numbers.
Your Business Mentor Ray is convinced there are local, regional or national companies that will meet your needs. Make sure you understand your needs and the business case for the equipment purchase. You will be able to put it together on your own or with the help of an equipment leasing broker.
A few of the bigger National Leasing Companies are:
- Balboa Capital – http://www.balboacapital.com/
- GE Capital – gecapsol.com/
- CIT Leasing – http://www.cit.com/index.htm