Equipment Finance

Friday, August 22 at 08:25 AM
Category: Business Banking

Most business owners spend considerable time analyzing and trying to improve the cash flow of their business for day-to-day operations and for growing the business.

One method of improving a company's cash flow is to finance/lease necessary equipment. This saves an initial outlay for the entire cost of the equipment and spreads it over some term with a built-in interest cost. Equipment financing is a very common way many small business owners help capitalize their business and manage their cash flow.

How does it work?
An equipment lease is a contract between the company (lessee) and the financing company (lessor). The financing company may be a bank, leasing company or the equipment manufacturer. The contract commits the company to make monthly payments over a period of time for the use of the equipment. It may also include an option for the company to buy the equipment, for some stated price, at the end of the lease. The amount of the monthly lease payment is based on:

  1. The purchase price of the equipment
  2. An interest rate built into the payments
  3. Term of the lease
  4. Creditworthiness of the lessee
  5. Estimated residual value of the equipment at the end of the lease
  6. Useful life of equipment

There may be some initial down payment on the lease. During the lease period, the lessee usually has the obligation of maintaining and insuring the equipment. At the end of the lease, depending on the terms, the lessee may buy the equipment or simply return it to the lessor.

Benefits of equipment finance:

  1. Any initial down payment will, of course, be less than the total cost of the equipment. This immediately reduces cash outflow.
  2. Lease payments can be a tax-deductible business expense. If you own the equipment outright, there would be annual depreciation expenses.
  3. The lease approval process is usually relatively quick.
  4. The amount of paperwork may be less than that required for a business loan.
  5. An option to purchase at the end of the lease gives the business the right, not the obligation, to purchase. This choice can enable the business to reduce the risk of ending up owning a piece of obsolete equipment.
  6. Most leasing companies will require a personal guarantee of the lease by the owner of the business.

In evaluating whether to buy or lease, make sure to weigh the benefit of improved current cash flow against the cost of money (the interest rate) built into the lease. If leasing makes sense for you, this method of financing can be a very good way to grow your business.

Tags: Arvest Biz, Business Banking, Equipment Finance
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