One of the most common expenses a business can encounter is the need to purchase or upgrade equipment, but choosing an equipment leasing company can be a challenge. Choosing one that will give you a good deal that fits the specific needs of your company can be downright daunting.
Don’t know a TRAC lease from a leaseback? A tax lease from a synthetic lease? Not sure where to start looking? The equipment leasing industry’s websites are notoriously full of opaque, specialized terms … and that’s when specific terms are offered at all.
We’ll try to demystify the process below, and hopefully put you on the right track.
|Financing Need||Best Product Type||Recommended Lender|
|Financing Platform||Any||Currency Capital|
|Renting||Operating Lease||Crest Capital|
|Big Ticket Items||Any||TCF Equipment Financing|
|Purchasing w/Lease||Capital Lease||CIT Direct Capital|
Find A Lessor Who Will Work With You
The easiest way to rule out a potential lessor (the company that finances the lease) is to see if they serve your industry. Most lessors, particularly those that work with resales, specialize in specific industries. Even the least transparent lessors tend to be upfront about the industries they’re able to finance, so it’s not a bad place to start. If possible, you’ll also want to see if they finance the specific type of item you’re looking for.
Next, you’ll want to take stock of your own profile as an applicant. How good is your credit? How long have you been in business? What’s your revenue? How much debt have you taken on?
Lessors don’t always advertise their minimum qualifications. Since your time is limited and valuable, if you have reasonable doubts about your ability to qualify with a particular lender, I would recommend prioritizing more transparent lenders. You don’t want to waste time filling out a long application only to be rejected. To save yourself some headache, take advantage of online screening/pre-qualifying tools the lessor might offer.
Choose The Right Leasing Arrangement
This is where it gets a little complicated.
Because you’re dealing with a tangible asset, when making a deal with a lessor, you’ll need to be prepared to work through anÂ enormous number of lease variations covering different possible ownership arrangements.
The simplest leases function as loan replacements. That is to say, the lessor finances your equipment, which you are considered to have ownership of either immediately or by the end of the lease. You’ll make regular payments, typically monthly, for the length of your lease, at the end of which you’ll pay a small residual fee to close it out. These are called capital leases.
Why would you want a capital lease instead of a straightforward loan? While the interest rate is usually higher than it would be with a comparable loan, a capital lease covers the full cost of the equipment you’re buying and, very often, associated transportation and installation costs as well. These leases also tend to be easier to get than traditional loans.
But what if you don’t want to own the equipment long-term?
In that case, you may want to look for an operating lease. Operating leasesÂ are more like rentals with the option to buy. The lessor will retain official ownership of the asset, but you’ll have possession of it for the length of the lease. At the end of the term, you’ll have the option to return the equipment to the lessor or purchase it for a residual — typically fair market value (FMV).
There are a huge number of variations on both operating and capital leases, as well as tax advantages and disadvantages to both which you should discuss with an accountant. But generally:
- If the equipment you’re considering will not become obsolete quickly and you’d like to own it, choose some form of capital lease.
- If the equipment you’re considering depreciates quickly or becomes obsolete within a couple years, you probably want an operating lease.
Once you know what type of lease you want, you can narrow down your list of eligible lessors.
What About Equipment Loans?
Nothing wrong with them! If you’re looking at capital leases, you should also consider getting anÂ equipment loan.
Equipment loans usually cover around 85 percent of the cost of the item, so be prepared to make a downpayment unless your lender specifies that they cover the full price.
One nice thing about equipment loans is that the purchase itself can serve as collateral (or security) for the loan, which means you’ll generally see lower interest rates than you would with an equivalent unsecured loan.
Check out our equipment financing resources if that sounds interesting.
|Lender||Borrowing Amount||Term||Interest/Factor Rate||Additional Fees||Next Steps|
|$2K – $5M||Varies||As low as 2%||Varies||Visit Site|
|$5K – $500K||24 – 72 months||Starts at 5%||Yes||Compare|
|Up to $250K||1 – 72 months||Starts at 5.49%||Varies||Compare|
Compare Rates & Fees
While the ability to get financing is great, you don’t want to pay more than you have to for the pleasure. This is much easier when you’re dealing with transparent lenders who lay all their cards on the table.
What terms and fees should you be aware of when looking into an equipment lease?
- Interest Rates:Â The biggest cost you’ll run into with financing should be the interest rate. Generally, lower is better, but make sure you know how often and in what way the interest rate is applied.
- Origination Fee:Â Common with loans, but unusual with leases, this is a fee that’s applied upfront. In most cases, it is deducted from the amount of money you receive when you get your capital.
- Administrative Fee:Â This can be rationalized in any number of ways by your equipment financer, but it is a fee charged for servicing your account. It may be charged once, or at specific intervals.
- Downpayment:Â The percentage you’re expected to pay out of pocket towards the equipment you’re buying. Common with equipment loans. With leases, there generally isn’t a downpayment, but you may be expected to pony up the first and last month’s payment up front.
- Monthly Payment:Â The amount of money you’re expected to pay each billing cycle, usually monthly. In the case of leases, the higher your payment, the lower your residual will be.
- Residual:Â An amount leftover at the end of your lease that you pay if you decide you want own your equipment. The lower your residual, the higher your payments will be.
The Best Equipment Leasing Companies
Not ready to build a spreadsheet comparing every equipment leasing company on the market? No worries. We can get you started.
Note that you’ll also want to consider leasing from banks or credit unions with which you’ve already built a relationship, as many times they can offer you the best rates (assuming you make the credit cut). If you’re dealing with a major brand, you may also want to consider working with a captive lessor.
One of the most efficient ways to seek equipment financing is through an aggregator service like Lendio. With one application, you’ll effectively have access to Lendio’s 75+ affiliates.Â One nice thing about this service is that it’s free on the borrower’s end, so you’ll only have to worry about fees charged by the company Lendio ultimately connects you with.
Be aware that, although Lendio can work with customers with credit as low as 550, for equipment financing you’ll usually need to have a credit rating over 650.
For those who successfully apply, Lendio’s partners will finance the full cost of your equipment.
Another aggregator option for equipment financing is Currency Capital.
While online lenders have taken great pains to streamline application processes for working capital loans, equipment financing tends to be more traditional. Currency set out to change that, developing an API they compare to Amazon’s 1-click shopping experience.
Getting setup with Currency is a bit more laborious than, say, working with Lendio, but if you’re thinking ahead to future purchases, it may be worth the investment.
Want to skip the middle men? Check out Crest Capital.
Crest deals in just about every kind of lease you could think of, whether you want to own your equipment or just operate it for a little while. Additionally, they’re able to work with a wide variety of industries including agriculture, manufacturing, automative, and medical, as well as office equipment and software.
You will need to have been in business for at least two years, however, and have a credit rating of 650 or better.
TCF Equipment Finance
TCF Equipment Finance, as the name implies, is the equipment financing and resale wing of TCF Bank. As a bank, their lending practices are as conservative as their pockets are deep. That means TCF is a good solution for mature businesses with excellent credit.
TCF offers many variations on capital and operating leases and works with most industries.
CIT Direct Capital
Another good option for those with solid credit ratings is CIT Direct Capital. Their equipment financing division doesn’t have quite as broad a variety of lease types of some of the other options here, but it’s easier to meet their qualifications than those of many banks.
Both capital and operating leases are offered.
Between the hundreds of equipment leasing companies out there and the often strict qualifications needed to get financing, it can be a challenge to find a lessor who meets your needs. Hopefully you now have a better sense of what to look for when choosing an equipment leasing company.
Having trouble meeting the high lending standards for equipment financing? Don’t panic! Many other types of financing can be used to purchase equipment. For smaller items you can pay off quickly, you may want to consider a business credit card. For larger items, check out installment loans.
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