Equipment Leasing for Startups
What is Equipment Leasing or Equipment Financing?
Instead of your startup buying equipment, it can lease it. Under a lease you contract to pay a monthly rental fee for its use. Equipment leasing is available for all types of equipment from major manufacturing equipment to smaller equipment such as computers. Equipment leases are available from banks and finance companies as well as from equipment manufacturers and dealers.
Which Startups Should Use It?
Startups should explore leasing if they:
- require a lot of expensive equipment but wish to avoid tieing up large sums of money on the downpayments required by purchasing,
- need to change their equipment frequently and thus avoid having capital tied up in soon-to-be-obsolete equipment,
- have the cash flow which can readily cover the monthly payments but don’t have the money to lay out for a purchase of equipment.
When is Leasing the Best Choice for a Startup?
Startups should consider leasing when they:
- have the orders but lack the equipment to fill them,
- when the bank is dragging its heels on the purchase loan approval,
- when there are tax benefits,
- when the principals have strong credit ratings.
When Should Leasing Be Avoided?
Startups should avoid leasing when:
- they can afford to purchase the asset,
- when the cost of purchasing is substantially lower than that of leasing,
- when they can pay for the acquisition with a line of credit,
- when the principal’s credit rating is low and he is likely to be refused,
- when there are tax benefits to purchasing rather than leasing.
Tips for Getting Approved
You can obtain a better deal for your startup by:
- talking to your bank or regular lender as they maybe able to give you better terms than a leasing company or manufacturer,
- analyzing the tax consequences of leasing versus purchasing,
- demonstrating to the leasing company that you have orders in hand which will provide the cashflow needed to cover the payments,
- negotiating the cash sales price first, so that you’ll know the value of the equipment if you were to buy it rather than lease it; then negotiate on both the total price of the equipment and the interest rates to be charged.
Drawbacks to Leasing
The drawbacks include:
- you can’t use a leased asset as collateral for a future loan,
- interest rates can be very high (so be sure to negotiate it before committing),
- some lease terms are longer than the life expectancy of the asset, so make sure that you don’t get stuck making payments on obsolete equipment,
- one missed payment can trigger a repossession,
- leases are long term and can be hard to get out of,
- a thorough examination your credit history,
- a requirement that you pledge additional collateral to secure the equipment,
- a requirement for copies of your personal tax returns.