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Equipment Leasing 101

Do you have your eye on a new piece of equipment for your shop—or have dreams of starting your own business—but have no idea how you’ll pay for it? Lease financing may be your answer.

Equipment Leasing 101

Find Out Why Some Businesses Choose to Lease Big-Ticket Equipment Purchases

By Carey Kroll, Geneva Capital LLC

(Originally published in the September 2015 issue of Recognition Review.)

Do you have your eye on a new piece of equipment for your shop—or have dreams of starting your own business—but have no idea how you’ll pay for it? Lease financing may be your answer.

Equipment leasing is simply an alternative financing option. Most lease companies offer both a true tax lease and a capital lease option, which is similar to more traditional loans. The best choice often comes down to how you’d like to write off the purchase for income tax purposes.

Equipment lease financing is chosen by small mom-and-pop shops and big business alike. Lasers, printers, and sandblasting equipment are an excellent fit for lease financing. Business owners are not limited to certain brands, though those with subpar credit may be able to get better terms when choosing equipment manufacturers that work closing with the leasing company.

What Are the Typical Lease Terms?

Lease terms range from 12 months to 60 months with the most typical terms being 36–60 months (3–5 years). The term and required down payment are based on the time the business has been in operation, the business’s credit, and the owner’s credit.

Can I Lease to Own?

Absolutely. About 95% of Geneva Capital’s clients select a “lease-to-own” plan or true tax lease. This option has a lower monthly payment with a balloon payment at the end. This is especially appealing to new companies and those that need some time to turn the equipment into a profit center. Companies also like the option to trade the equipment in at the end of the lease period since they may not know where their business will take them in the next few years or what changes technology will bring. You may be able to write off the monthly payments each year to maximize tax savings.

The alternative is a capital lease, which may be preferred by business owners who like the idea of owning the equipment rather than leasing to own or who are more familiar and comfortable with that option. Some business owners may choose the capital lease so they can take advantage of the Section Code 179 deduction, which may allow them to write off all of the cost in the first year. This deduction requires the income to offset the write-off, so it’s not an option for a lot of companies.

Why Does Leasing Offer a Tax Advantage?

In general, the Internal Revenue Service (IRS) does not consider an operating lease to be a purchase; instead, it is a tax-deductible overhead expense. Therefore, with a true tax lease, you can deduct the lease payments from your business income, resulting in a greater write-off than depreciating the purchase (as is required with a cash or loan purchase). With a capital lease, you may be able to use IRS Section Code 179 to write off the entire purchase the same year that you acquire the equipment. This is one of the biggest advantages to leasing. Consult your tax adviser for your specific situation.

Does Leasing Require a Significant Down Payment?

Not usually. Most commonly, the first and last month’s payments are collected upfront.

How Does Leasing Affect My Cash Flow?

Leasing has a positive impact on cash flow because you’re not paying for the equipment in one lump sum. By selecting a lease, business owners can conserve cash for other uses such as advertising, inventory, payroll, and other expenses. Leasing also allows for you to budget more accurately as you know the amount and number of lease payments and can be structured to reduce your payments for a specified duration each year to account for the seasonality of your business.

Business Is Good; Can I Lease More Equipment While Still Leasing My Existing Equipment?

Yes. Leasing companies can approve an application in a matter of a few hours and often with less documentation the second time around. This allows for you and your company to react quickly to new opportunities.

Can Leasing Help Protect Me from Equipment Obsolescence?

Yes, depending on the structure, a lease can allow equipment to be returned to the lessor at the end of the lease term. This allows you to upgrade your equipment and keep a competitive advantage by avoiding having obsolete or worn out equipment.

How Does Leasing Look to Potential Lenders?

Operating leases are not considered long-term debt or liability on your balance sheet, which makes you look more stable to lenders when you need them.

Is Leasing Flexible?

Absolutely. Lessors offer flexible terms that enable you to customize your lease to a program that will fit your needs and requirements—cash flow, budget, transaction structure, cyclical fluctuations, etc. Some of the most popular customizable programs are no money down, no payments for three months, or reduced payments during your historically slow season.

There are many options when determining financing for your equipment. While leasing works well for many, it’s not the solution for everyone. Consulting a tax professional or a financial advisor may help you decide the best choice for your unique situation.

Carey Kroll is regional sales manager at Geneva Capital LLC, a member of the Awards and Personalization Association. To find out if leasing is the best choice for you, or to create a leasing plan of your own, contact Kroll by calling 800.408.9352 or visiting Attending the Great Lakes Awards & Personalization Expo October 23–24 in Toledo, OH? You can talk to Kroll in person about the specifics of your business and the possibility of leasing equipment.

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