Most new business owners often think of banks when considering possible financing sources. Unfortunately for the new entrepreneur, traditional bank financing may be impossible to obtain, at least in the first two years of business activity. Another option available to the business owner may be equipment leasing.
When applying for equipment leasing, it is necessary to have accurate, timely financial records. These records will allow the financier to determine the viability of the business. The entrepreneur must be able to provide all of the traditional financial documents, including income statements, balance sheets, and business and personal tax returns. Also, a short description of the business, including the operations, revenue results-to-date, along with projected future revenues, will be invaluable in successfully obtaining financing.
The business owner is well-advised to perform with due diligence when choosing an equipment loaner. Some of the factors to be considered are the age and condition of the equipment to be leased, and maintenance responsibility. Some leasing contracts may include routine maintenance in the monthly cost. Another consideration is insurance for replacement due to theft, vandalism, or natural disasters.
Another critical consideration is the end-of-lease terms for either returning the equipment or purchasing the equipment outright. The two most common end-of-lease terms are one-dollar purchase or fair market value. With a one-dollar purchase agreement, the business owner owns the equipment at the end of the lease, in exchange for paying one dollar for the material. In the fair market value scenario, the business owner agrees to buy the equipment at current market rates. The fair market value agreement will result in lower monthly payments; however, the purchase price at the end of the lease can be substantial.
Another important consideration is the overall tax strategy of the entrepreneur. Suffice it to say that the tax advantages of leasing may be more desirable than buying equipment outright. A typical tax benefit, known as the Section 179 tax deduction, allows a substantial reduction in tax during the first year the equipment is leased.
Many start-up entrepreneurs will find equipment leasing to be an essential component of the overall business strategy. Leasing flexibility, equipment upkeep, and repair, along with tax savings, can make leasing a very attractive alternative.