5 Different Types of Equipment Financing Options
When choosing to grow your business, sometimes a little can go a long way. Investing in equipment is a great way to increase production and capital. Unfortunately, equipment can run at a high cost and most small business do not have the money on hand to purchase it in full. Most resort to traditional lenders for extra funds but get caught up in all the financing options. To give you an advantage, we have put together a breakdown of five different equipment financing options.
$1 Buyout Lease
A $1 buyout lease is a capital lease where you make monthly rental payments to access and use the equipment, but at the end of the lease, you have the option to buy the equipment for $1.For all intents and purposes, you’re treated like the owner of the equipment. With this type of lease, there is no uncertainty about the value of the equipment at the conclusion of the lease as the buyout terms are generally a part of the initial agreement. Leased assets will appear on your business’s balance sheet and the lease will appear as a corresponding liability.Since you get to buy the equipment for just $1, the characteristics of this type of lease are similar to a loan, with higher monthly payments than an operating lease. You should use a $1 buyout lease when you know you want to own the equipment after the lease is over. If the equipment has a long shelf life and will not lose a lot of value over time, it’s more economical to do a capital lease like this one. The $1 buyout lease will have higher monthly payments than other capital leases, but the payout at the end is the lowest.
Sale/Leaseback financing is a unique and effective method for generating capital for your business needs. You use your equipment to get the capital. There are many potential benefits for your business if you choose this option. With a Sale/Leaseback you can continue to use your equipment, so productivity never slows down, and your revenue should remain constant. The extra capital you get can be applied to expanding your business and increasing revenue as it can be used for any purpose.Because you will be leasing your equipment back, the complete monthly payment is 100% tax deductible. More capital is freed up for businesses that do a Sale/Leaseback because the equipment is no longer being financed at a regular bank, nor is it cutting into the lines of credit you have with the banks. You can use those extra lines of credit to expand your business the most effective way possible.
Also referred to as a fair market value lease, true leases have the notable feature that their structure does not contemplate a full payout of the equipment’s cost, as is the case with finance type leases. Two of the common agreements are that the term of the lease is generally not greater than 75% of the equipment’s anticipated useful life and the present value of the lease payments should not exceed 90% of the fair market value. Because of this, a significant benefit to true leases is lower monthly payments. At the end of the lease, the lessee either returns the equipment or may be granted the opportunity to purchase the equipment from the Lessor at “the fair market value.” Payments under this kind of lease structure are treated by the I.R.S. as rental payments and are 100% tax deductible.
A TRAC lease is a specific type of true lease that is generally used for “over-the-road” vehicles like trucks, tractors, and trailers. Special provisions of the I.R.S. code allow for pre-determined residual values to be negotiated in advance while maintaining the “full deductibility” of a true lease. This type of lease is generally less expensive than other conventional leases or bank financing with the lessor retaining the rights to any depreciation.
Purchase Upon Termination Lease
This end-of-lease option establishes a set purchase price, usually expressed as a percentage. P.U.T. leases are a technique for lowering the lease payments during the lease term without creating an unknown end-of-lease risk for either the Lessor or the lessee. Lease payments are fixed and agreed upon before exchange.
Equipment Financing Loans
Growing your business can be hard. Many traditional lenders do not offer small business equipment financing to startups. For those they do offer equipment financing to, lessees must have several years of operating history and a high credit score. At Lendr, we believe in providing small businesses with the financing they need to invest and grow their business. To learn more about Lendr and the other types of financing we provide, contact us at 855-928-1919.