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Securing the right equipment is crucial for any small business, but purchasing it outright isn't always feasible. Equipment financing offers a flexible solution, allowing businesses to acquire necessary tools, machinery, or technology without a large upfront capital expenditure. This guide will walk you through the different types of equipment leases, payment options, how to choose a reliable financing partner, and what to expect during the application process.

What Are the Main Types of Equipment Leases?

While equipment leasing firms may offer various specialized programs, most leases fall into one of two fundamental categories:

Finance Leases (Capital Leases)

Finance leases are often the most advantageous lease financing solution if your business intends to own the equipment eventually. With this type of lease, you typically have the option to purchase the equipment for a nominal price at the end of the agreement. The payment term is usually structured to align with the expected useful life of the equipment, making it ideal for assets you plan to keep long-term.

True Leases (Operating Leases)

Unlike finance leases, the term of a true lease is not necessarily tied to the equipment's full useful life. At the end of the lease term, your business can either return the equipment or purchase it at its fair market value. Payments for true leases are generally lower because the leasing company retains the right to resell the equipment after the lease expires. This lease type also offers the opportunity for your business to potentially write off the payments as an operating expense, which can be a tax advantage.

What Payment Options Are Available for Equipment Leases?

Equipment financing companies often provide a variety of payment plans designed to accommodate different business financial situations:

• Skip-Lease Option: If your business experiences seasonal revenue fluctuations, a skip-lease option allows you to defer payments during lower-income months without incurring penalties.
• Step-Up Lease: For businesses with limited upfront funds but an urgent need for equipment, a step-up lease offers lower initial payments that gradually increase over time as the equipment begins to generate revenue.

How Do You Choose the Right Equipment Financing Company?

Selecting the right equipment financing company is a critical step. It's important to find a provider that acts as a true business partner, offering support and understanding rather than just a transaction. Here's what to look for:

• Supportive Partnership: The company should be attentive, answer all your questions, and demonstrate a willingness to work with you through challenges. Avoid companies that are quick to repossess equipment or escalate rates at the first sign of a late payment.
• Experience and Specialization: Look for a lease provider with extensive experience in equipment leasing. Some companies specialize in specific industries, while others offer solutions across a wide range. A specialist in your line of business may offer better deals and more tailored services throughout the lease agreement. Research is key to finding a firm with the expertise your business requires.
• Reference Checks: Before making a final decision, always conduct reference checks with existing customers of the financing company. Ask the company to provide contact information for three to four references from businesses similar in size and industry to yours.

What to Ask During a Reference Check

When speaking with references, inquire about the following:

• Whether the finance company treated them fairly.
• If they were able to secure the right type of lease for their specific needs.
• How helpful the leasing company was with the application process and paperwork.
• What the financing company's reaction was if they encountered problems making lease payments.
• Whether they would be willing to work with the same financing company again in the future.

Beyond references, compare the terms and conditions offered by several financing companies against your business requirements. Contact three to four different firms for quotes. To get an accurate comparison, provide each firm with the following information:

• The cost of the equipment.
• The desired term length of the lease.
• Your intention regarding purchasing the equipment at the end of the term.

While quotes are generally accurate, remember that actual payments may vary slightly based on your final credit situation. Ensure you compare similar lease packages to make an informed decision.

What Is the Application Process for Equipment Leasing?

Once you've thoroughly evaluated your options and decided on the best financing firm for your equipment leasing needs, it's time to complete an application. It's crucial to apply only when you are confident you will proceed with that particular financing firm.

Equipment lease applications are treated similarly to other credit applications. Each application can appear on your credit report, and multiple inquiries within a short period could potentially impact your future credit prospects. This is why it's important to be fully convinced about your chosen leasing company before submitting an application.

Obtaining an equipment lease can sometimes be more challenging than securing traditional loans. Many financing companies prefer businesses with at least two years of operating history, and some may have strict minimum credit score requirements. However, once your application is submitted, you can typically expect a reply from the equipment financing company regarding their decision within two to three business days.

Frequently Asked Questions

What are the two basic types of equipment leases?

The two basic types of equipment leases are finance leases (also known as capital leases) and true leases (also known as operating leases). Finance leases typically allow you to purchase the equipment at the end of the term for a nominal price, while true leases give you the option to return the equipment or buy it at its fair market value.

How do payment options for equipment leases vary?

Equipment lease payment options can be tailored to a business's financial situation. Common options include skip-lease plans, which allow businesses with seasonal revenue to defer payments during slow months, and step-up leases, which start with lower payments that gradually increase over time.

Why is a reference check important when choosing an equipment financing company?

A reference check is crucial because it provides insight into a financing company's reliability and customer service from the perspective of their existing clients. It helps you assess if the company treats customers fairly, offers appropriate lease types, provides good support during the application process, and is willing to work with businesses through payment issues.