Part 2 Leasing 101: What should I know before leasing equipment

By January 14, 2015 Blog, Equipment Leasing No Comments
Opportunity Updates


Part 2 Leasing 101: What should I know before leasing equipment.

Should I use my business line of credit at my bank or secure a lease for the equipment?

What collateral will the lease company require?

What type of lender should I contact?

What types of business equipment/products can I lease?

What are my options if I can’t qualify for a equipment lease?

 

Should I use my business line of credit at my bank or secure a lease for the equipment?

Banks are collateral lenders and do no lend(in the majority of cases on signature only). Therefore, most loans have some type of collateral that is equal or more than equal of the value of the asset. If you purchase a home you have to put a % of the overall cost down as a down payment and the value must meet their standards for the bank to lend the amount requested. However, if you are using funds from a line of credit; there really isn’t one major item to use as collateral. So most lines of credit  have a lien on your business and on all of your personal assets(collateral). Whereas, an equipment lease usually has a UCC lien filed only on the equipment. The business owner almost always signs a personal guaranty as the owner, but that is just documentation whereas the owner is taking responsibility for the loan. It doesn’t report on their credit bureau as a lease and there is no lien filed on their personal assets. To reiterate, in most cases, a lease only has a UCC lien filed on the equipment that is being leased.

Therefore most lines of credits at banks are usually used for emergency short term funds or soft type funding, Due to the overall risk to the business and the owners. Not only are the lines of credit highly collateralized but the bank can require monthly, quarterly, or annual financial updates. If the credit worthiness of the business DOES NOT meet their underwriting standards they can CALL the loan. In simple laymen’s terms this means, they can force you to pay back the full amount upon demand. This doesn’t happen often, but we saw during the financial collapse of 2007-2010 many businesses unable to continue to stay in business due to the demand to cover the full amount of a bank loan or line of credit. The great news about an equipment lease is that as long as you are paying your payment the loan won’t and can’t be called. Though bank lines of credits will typically have lower overall rates the business risks could be greater than the small monthly savings.(This is meant to be general information please contact your bank/CPA or attorney for your specific loan details).

You should also consider how a lease versus a line of credit will affect your overall cash flow for future growth or loan borrowing needs.

I always ask my lease clients to consider A worse case scenario to decide whether the bank line of credit or a lease makes sense. Consider  that you are a company operating in Florida and a hurricane hits your area. Your factory cannot operate for months and until the infrastructure in your business and community is back in place will your funds be limited and your financial strength weakened. The last thing you want to be concerned about is having to pay a line of credit back during that time. This is why leasing equipment is very wise for most business owners. Your bank loan can be called if your financial strength decreases(and/or you could use the open line of credit for operation reasons) while your equipment lease just continues to be paid and has no effect on your overall operation. As always please consult your CPA and attorneys for the best advise for your particular business.

What collateral will the lease company require?

In most cases the only collateral for an equipment lease is a UCC on the leased equipment, filed with your state. The owners will typically sign a Personal Guaranty, which is a guaranty that as the owner of the company they agree to pay the lease timely.

What type of lender should I contact?

There are many options here and they will all depend on many different circumstances. For example, is your personal or business credit good, are you an established business, do you have current relationships, are you just leasing equipment. Here is a list of potential types of sources for an equipment lease and sources for other needs:

Equipment Lease Company, Bank, Alternative Funding Corporation, Cash Advance corporation, Private Funding, Venture Capital, Start up business lender, SBA(government backed) Lender.

If your credit is good for personal and business and you have at least 3 years time in business, you should contact an established equipment lease company or bank lease company. It maybe advantageous to work with a  lender that has multiple contracts with many various banks and sources. That way your lease consultant can ensure they can secure the best lease for your business growth and needs. Above all, be diligent, ask for references, check their references and read all small print. Never blindly give money to a company that is offering you a deal that is too good to be true. If it  sounds too good to be true it probably is. Words of wisdom my mother told me years a go.

What types of business equipment/products can I lease?

Most tangible business equipment can be leased. Whether a stove or a backhoe. There are companies that specialize in all types of products and items. Software/Hardware and even cloud products can usually be leased in 2015. You should ask the company that you are considering as your lease company whether they have experience with your product and ensure that their programs and terms make leasing a viable option  for the product and it’s warranty and useful life. Remember each company has their  specific rules for all types of products. Rates/length of lease/end of term options/length of paperwork, etc. are all important aspects of determining if a lease is right for your business.

What are my options if I can’t qualify for a lease?

There could be many options and different avenues for you to pursue for funding. First and foremost you will need to find out why you were not approved and see if it is a viable issue or just an issue related to the finance company you were speaking with. You are required by law to receive a credit report and letter stating why you were declined.  Is it time in business(if so wait another year or until you hit the 2-3 year mark), was it person credit(How can you clear up the credit issues), Is your credit limitied(ask your finance consultant how you might increase your credit). Typically a little research can help you figure out a plan to ensure your business will qualify in the future.

If that is not an option there are alternative funding options such as: AR lending(on your receivables), Cash or credit card merchant advance loans, Asset lending, and other alternative options.

Author: Pamela Hewett is CEO of Professional Funding Corporation. She has been actively helping businesses and national vendors implement lease programs for over 18 years. She previously was a VP with American Express and Citicapital operating national lease programs for many large national healthcare and other vendors. She currently works with both private businesses, Fortune 500 companies, and national vendors helping secure equipment lease and other funds.