The biggest challenge for starting up a business is the costs required to start and having enough capital to do it. It becomes tougher for businesses that require equipment in order to function.
Out of all the costs, equipment is one of the top three biggest costs for businesses – with the other two being labour and rent. Depending on the business, equipment can demand at least 56% of startup costs. As a result, restaurants, hospitality, construction and fleet businesses make for the most expensive businesses to start up.
But despite the high costs, new businesses can get off the ground provided that the business owner has the know-how and is able to navigate through the business world and find the right solutions to leverage. To that end, here is what new businesses can do about equipment financing and how it can benefit any business.
For new businesses, painting a financial picture helps put everything into perspective. The first thing many new businesses will note is that the capital is going to be somewhat limited for any large purchase. This is fine as working capital should be used for the daily operational costs.
From there, business owners should consider how new equipment fits into the business. More importantly, how financial engines will fit into the financial structure of the business. For new businesses, they could investigate financing or leasing which have their own unique perks [Leasing vs Financing Construction Equipment article]
In all likelihood, leasing would be the better option as it offers necessary working capital for large equipment. Monthly payments over a long period of time is more manageable and less financially risky.
In the cases of new businesses, a credit history isn’t established yet. Leasing companies are fully aware of this and they expect every business they deal with to have credit history. The reason is simple: leasing companies use the equipment they lease to businesses as collateral.
This isn’t the case with equipment financing companies who check credit history and may refer to the business owner to get it or deny credit altogether.
On the other hand, leasing companies will still look at the owner’s credit history and will refer to that. The credit history is used to determine whether to lease equipment, but also to determine interest rates of the monthly payments. The better the credit score, the lower interest companies will pay.
There are different kinds of financing options available to businesses though it depends on the kind of equipment that’s needed. Each type of financing option has its own unique perks and is more beneficial in certain situations.
Business that are looking to purchase equipment that has a long lifespan will be looking for entirely different forms of financing than those who are purchasing equipment that becomes redundant fast.
For example, printers and laptops are office equipment that are useful for about two years. After that, they become redundant as technology evolves and there are more useful versions that are launched. Buying this equipment every time will cost more than leasing and replacing the equipment after the term is over.
Those are operating leases. The lessor provides the lessee equipment at a monthly rate for a set period of time. After the term is up, the equipment is returned. The lessee can then choose to upgrade, cancel the contract, or re-lease the equipment.
Equipment can often bring extra costs with it depending on the situation. Things such as maintenance, insurance, licensing fees, transport fees, import fees, and training. These are associated costs that stem from equipment.
Equipment financing though mitigates the risks of those costs, especially in operating leases. In those instances, the lessor has the rights to the equipment and handles those costs. Those are factored into the lease itself.
Capital leases work differently since the result is the lessee owning the equipment. Businesses will find they will be looking at covering insurance and maintenance costs during the term. However, with good negotiation skills [How to negotiate the best leasing rates for your equipment article], those costs could be added into the lease.
From an accounting perspective, how businesses buy equipment is recorded differently on the books and that does make a different.
For businesses buying equipment with cash, anything purchased with cash is an asset on financial statements. That said, because the equipment now is owned by the business, depreciation now becomes a factor.
Leases are completely different and aren’t as impactful on the balance sheet. Opting for operating leases presents even less risk. Because the business isn’t outright owning the equipment and is making monthly payments, it’s recorded as an expenses on the income statement. It would be similar to rent. As a result of the payments being an expense, there is no depreciation.
Because of the relationship above, leasing provides incredible tax benefits to businesses. After all, expenses to the company can be claimed back through taxes. In the cases of operating leases, these expenses are recorded as “ordinary and necessary” and can be written off.
Best of all, since the equipment isn’t an asset, there is no need to consider the amortization or factor capital gains for tax purposes either. On the books, the equipment is considered a debt for the business that is fully tax-deductible. With that in mind, businesses can also write off interest on the lease too.
All that said, be sure to consult with a tax consultant about the details of all this.
The last thing to keep in mind is the ramifications of new equipment in terms of investors and future lines of credit. Both credit providers and investors will check financial statements to determine risk and creditworthiness. Leasing offers more room for future credit lines. Furthermore, investors will also determine that monthly expenses of equipment are less risky for them and may be open to invest.
After everything is said and done, the final consideration is which company to consider leasing with. There are several equipment financing; however, it doesn’t hurt to shop around. A quality equipment finance company will be one that works with other businesses and accommodates new businesses to structure deals suitable for them.
Get started leasing or financing the equipment you need. Contact Yellowhead Equipment Finance today to get started. We’ll help you identify your eligibility, work with you to understand your options, and work with appropriate lenders to get the best solutions for your financing needs.