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Commercial Equipment Leasing – Guide + Financing from $10 Million

September 26, 2020

Many companies rely on commercial equipment leasing to finance the equipment they need to operate. Leasing has certain advantages over outright purchase or commercial equipment loans. We’ll explore commercial equipment leasing in this article and we’ll discuss how Assets America© can provide you the type of financing you need! We can help when to quickly finance commercial equipment transactions starting at $10 million with no upper limit.

What is Commercial Equipment Leasing?

Commercial equipment leasing is a type of commercial equipment financing. In its simplest form, commercial equipment leasing allows you to rent equipment for a defined period with minimal upfront costs. You have various options when the lease expires, as we’ll discuss below.

Commercial equipment comprises manufacturing machinery, devices, flow lines, automatic apparatus, robotic equipment, etc. that commercial enterprises use. These enterprises can include wholesale trade, retail trade, manufacturing, and the food service industry. Commercial equipment also includes the equipment you’ll find to operate supply depots and warehouses. The functions of commercial equipment include:

  • Displaying
  • Extracting
  • Fabricating
  • Loading
  • Mining
  • Processing
  • Selling
  • Storing
  • Transporting
  • Unloading
  • Weighing
  • Manufacturing

and other functions that commercial operations perform.

Almost any equipment you can purchase, you can instead lease. Startups and young companies like leasing because it requires less cash outflow.

How Does Commercial Equipment Leasing Work?

Operating leases comprise the most popular form of commercial equipment leasing. With an operating lease, you get to use the equipment, but you don’t have any ownership rights. Instead, the leasing company (or lessor) or financial institution retains the ownership rights. Normally, the balance sheet does not carry commercial equipment that you obtain via an operating lease.

A lease purchase agreement or lease option allows a company to buy the equipment instead of returning it to the lessor. In a closed-end lease, you return the equipment without further cost. Conversely, an open-end lease specifies smaller monthly payments and a final balloon payment.

There is a wide variety of commercial equipment lessors, including:

  • Alternative finance companies
  • Banks
  • Brokers
  • Distributors
  • Equipment dealers
  • Leasing companies

Leasing equipment and borrowing equipment costs about the same amount, depending of course upon the term, the length of the agreement. The cheapest method of ownership is to buy outright since you don’t have to pay out any interest. However, an outright purchase depletes cash and may leave you unable to undertake other capital projects or possibly even leave you short of making payroll. However, if you’re going to use the equipment for many years, outright purchase may be your best bet, followed by debt financing.

Leasing Makes Sense

Leasing makes sense especially if you need the equipment for a relatively short time or the equipment goes obsolete quickly, or you really need to conserver your capital. The later is the most common.

The types of commercial equipment include:

  • Agricultural Equipment
  • Automotive Equipment
  • Communication & Telephone Equipment
  • Computer & Technology Equipment
  • Fixtures & Racking
  • Forestry & Logging
  • Industrial & Manufacturing Equipment
  • Landscape Equipment
  • Machine Tools
  • Material Handling Equipment
  • Medical & Health Care Equipment
  • Office Furniture & Equipment
  • Printing Equipment
  • Restaurant & Hospitality Equipment
  • Software
  • Trailers
  • Transportation

Commercial Equipment Financing Requirements

If you want to finance your equipment purchases with a loan, requirements include:

  • Ideally, you will need a credit score higher than 680.
  • You should be able to show that you’ve been in business for at least one year.
  • You’ll need a down payment between 10% and 25% or higher.
  • You must demonstrate sufficient cash flow to service the loan.
  • Further, you should be free of prior bankruptcies, criminal convictions, or current fraud charges.
  • You must provide suitable documentation, including financial statements and tax returns.

Leasing vs Loans

You can lease or you can choose commercial equipment loans. Very often, leasing is better, especially if you wish to preserve and maintain capital reserves.

Leasing

If you want to simply use the equipment without the additional cost of ownership rights, leasing is for you. Leasing may not require a down payment, and you can expense the monthly lease payments immediately. The equipment is off-balance-sheet and therefore doesn’t impact book value. For high-end equipment, lessors often require servicing and maintenance to be paid for within the lease contract in order to maintain the value of the equipment.

Commercial equipment leasing provides certain benefits, including:

  • Affordability: It requires less cash to lease. You don’t need a down payment for a loan or the outright purchase price. Often, monthly rental payments can be lower than the debt service on a loan. This depends of course on the end of lease term buyout provisions and or the residual value.
  • Flexibility: Leasing can free capital for other uses. That can come in handy when you need to make payroll, purchase inventory, or pay operating expenses.
  • Staying Up to Date: When you lease commercial equipment, you can often replace it quickly at lease end with newer, more modern equipment. When you purchase the same equipment, you may find yourself stuck with obsolete and inefficient equipment. You would then have to pay to upgrade it or try to sell it for scrap. Again, this would dependent on the specific type of equipment, and how quickly such equipment would become obsolete.
  • Expensing vs. depreciation: Rental expenses are immediate, as are the tax deductions. You must depreciate owned equipment over several years. Thus, leasing can provide superior tax incentives relative to ownership.
  • Speed: Typically, you can arrange/finance a lease much faster than a typical equipment loan. Companies that move slowly may have trouble surviving. In business, it’s important to remain lean, mean, and nimble.
  • Maintenance Costs: You may be able to obtain a maintenance contract with leased equipment that is more reasonably priced than your own maintenance costs.

Loans

When you finance the purchase using commercial equipment loans, you need a down payment, often up to 20% or more. The loan’s interest rate is typically in the 3% to 30% range, which is highly dependent upon your length of time in business, your credit score, your cash reserves, your net operating income, etc. You can deduct the interest and the annual depreciation costs, plus any repair and maintenance expenses. You carry the equipment asset and loan liability on your balance sheet, which is exactly opposite that of leased equipment. The value of the equipment at the end of the loan varies. In some cases, you might have to sell it for scrap.

Commercial equipment loans have certain advantages over leasing, including:

  • Lower Cost: When you buy instead of lease, you don’t have to compensate the lessor for the obsolescence of the equipment. Lessors include the cost of obsolescence in their lease payment requirements. With purchasing, you absorb that cost yourself and thereby reduce cash outflow.
  • Asset Changes: You usually cannot modify leased equipment. But when you own the same equipment, you’re free to modify or alter it as needed.
  • Early Termination: You can usually prepay an equipment loan without penalty. However, if you terminate a lease early, you can bet you’ll have to fork over a very exorbitant sum.
  • Collateral: Once paid off, you can use the equipment to collateralize other loans. Lessees can’t collateralize leased equipment. Lenders can be less choosy because the equipment secures the loan.
  • Restrictions: In a lease, a lessor may prevent you from using the equipment in certain ways. You usually have much less usage restrictions when you own the equipment.
  • Extra Cash: If your business is a cash cow, buying equipment outright or through a loan will put extra cash to work.
  • Section 179: You can get accelerated depreciation on your financed assets if they meet certain parameters. In 2020, you get 100% bonus depreciation on your equipment purchases.

Video:  Should You Lease or Buy Equipment?

How Assets America© Can Help

If you need at least $10 million in commercial equipment financing, look no further than Assets America®. We can have your loan ready rather expeditiously, versus the weeks or months banks require. If you are smart, you’ll arrange all your financing through Assets America®.

Equipment Leasing & Loans FAQs

How do I know when I need to replace commercial equipment?

Typically, you’ll notice an increase in maintenance costs. Alternatively, your commercial equipment may have become obsolete, creating an opportunity cost for inefficiency. If the equipment leaks or makes strange noises, you may want to replace it.

What kinds of commercial equipment does AAI finance?

We are not picky, as long as the aggregate value of the equipment is at least $10 million. We can arrange a quick loan with a reduced fuss and paperwork. And of course, we will not finance equipment used for any illegal purposes.

What are the pros and cons of vendor financing?

The pros are lower upfront costs, convenience, easy upgrading, and very compelling deals. On the minus side, vendors may have equipment that is temporarily unavailable. Also, the loans may be too costly relative to other sources of funds.

Does Assets America also lease vehicles?

Not directly, but we will finance the purchase of a vehicle fleet with a minimum aggregate cost of $10 million. We can then facilitate a sale-leaseback of the vehicles so that you end up leasing them instead of owning them.

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