Business owners are increasingly leasing equipment. According to the Equipment Leasing and Finance Association (ELFA), 80% of businesses in the U.S. lease some or all of their equipment-related purchases. Leasing business equipment can be a great option for African American business owners who have historically struggled with decent approval rates from more traditional sources and lenders.
Benefits of Equipment Leasing
- Lets you preserve working capital since you do not have to provide the full cash amount upfront to buy equipment. You can then leverage your working capital in other operational ways such as scaling your business.
- Gives you access to equipment featuring the latest technology since you aren’t waiting until you can afford to buy the latest gadgets.
- Can lower your balance sheet debt, as lease payments are considered a form of business expense rather than longer-term debt liability.
- Helps you avoid the high costs of obsolescence, which is hanging onto outdated equipment. This is in comparison to having purchased the technology and being stuck with the potential sunk costs of the equipment obsolescence.
- Helps you avoid the high costs of repairs, as the maintenance of the technology typically will be included in lease package.
Types of Equipment Leases
An equipment lease contract will usually be structured where a lessor would buy the equipment directly from the manufacturer, then allow the lessee the right to utilize said equipment for a period of time (lease term), in exchange for monthly rental payments. There are six main types of lease programs:
- True Lease: At the end of the lease, the lessee is offered to either return the equipment, purchase it, or roll-over into a new lease with another piece of equipment.
- Capital Lease: At the end of the lease, the lessee can purchase the equipment for a specific amount such as $1.
- Master Lease: Allows the lessee to lease multiple pieces of equipment under one contract.
- Step-Up Lease: Allows the lessee flexibility of starting with lower lease payments but will rise over time.
- Deferred Lease: Allows the lessee some sort of grace period to begin using the equipment before the first payment is due.
- Skip Lease: Allows the lessee flexibility of making payments if their business is seasonal.
Finding a Leasing Company
Usually, it’s best to work with an equipment leasing broker with access to a variety of capital sources to provide you the best approval, lease rates, and terms based on your current needs. There are a variety of banks, lenders, and lease companies that can finance equipment in some form or fashion, but understanding their underwriting criteria can be very difficult and leave you frustrated in the marketplace trying to find the best “match” for your profile. In general, a leasing broker can help you get the best rates based on the four equipment leasing tiers:
- A Tier: If you have a solid business with a personal credit score over 700, you will qualify for the best rates at “A Tier.”
- B Tier: If you have a solid business with a personal credit score of 650 to 699, you will still qualify for very good rates at “B Tier.”
- C Tier: If you have a solid business with a personal credit score of 600 to 649, your rates won’t be the best nor very good, but they will still be somewhat manageable if the equipment is required for your operations. This would put you at “C Tier.”
- D Tier: If you fall into “D Tier”, it means your personal credit score is under 600 and approval would be hard to come by in general. If you are offered approval, expect to pay high lease factor rates and not be offered the best terms.