Lease companies have very streamlined appication processes that are designed to require very basic information for smaller ticket deals, with information requirements increasing with lease request complexity. As an example, for amounts requested under $25,000, the application can be completed in just a few minutes and an approval received in as little as an hour via electronic scoring systems specifically designed for speed. With higher value requests, more information will be required with approvals being issued in one to 3 business days in most cases. Compared to an equipment loan process that tends to require the same amount of information and time process an application, the leasing process is noticeably faster.
One of the reasons for the faster process is due to the demand by customer to have a faster process in order to take advantage of opportunities to purchase equipment when items come available and to reduce business down time when replacements are required. Another reason lies in the fact that the leasing company ends up owning the underlying security and they will also only focus on equipment they feel comfortable liquidating, allowing for a quicker assessment of any financing request.
Cash tends to be a precious commodity in any business, and the ability to create a higher level of financial leverage at reasonable costs is important to manage cash flow and acquire the necessary assets to run the business. For equipment leasing, leverage or the percentage of the asset value that can be financed, is as high as 100% in most cases. In cases where delivery, installation, and training costs are involved with the asset purchase, these related soft costs can be financed by the lease as well, effectively providing greater than 100% financing.
And by being able to access lease financing, a business can keep their line of credit and cash supply available for working capital and other requirements.
An approved equipment lease will be repaid through an amortized payment schedule that remains fixed during the entire lease period. The lease term can also be matched to the timing of the real depreciation of the equipment so that you’re only paying for the value being consumed versus paying for equity in the equipment that can’t be expensed until much later into the future. As a result, the lessee can more accurately manage cash flow and project future cash flow requirements including when asset replacements or upgrades will need to be made.
When you purchase an asset for cash, you are required to pay all the point of sale taxes at that time. With equipment leasing, the lease company is the one purchasing the asset, so they pay the taxes at the point of sale and the lessee only pays taxes on each lease payment as they come due. This creates a deferment of taxes which reduces the amount of cash outlay that is required at time of purchase.
Operating leases and capital leases have different accounting both for the business financial statement and income tax planning. Based on the nature of the business, there can be advantages to considering different types of leasing programs to get the most tax and accounting benefits. For instance, a capital lease is treated more like an equipment loan for accounting and taxation purposes, while an operating lease can allow for 100% of the lease payment to be classified as an operating expense.
There are numerous reasons to consider equipment lease financing in your business, but for the sake of brevity, we’re only going over the most common reasons we find that business owners and managers utilize equipment leasing.
Deferral of Tax.
When you purchase an asset, you are required to pay the respective sales taxes at time of purchase. With a lease, the leasing company is the owner of the asset at time of purchase, so they pay the sales tax. You pay sales taxes on each lease payment, deferring your tax liability years into the future.
As compared with equipment loans which tend to run around 36 months, equipment leases are more readily available for terms of 5 years and beyond, depending on the asset, age, and condition.
No Down Payment Required.
In many cases, the leasing company will only ask for one or two payments in advance, greatly reducing the drain on cash flow.
True 100% financing
Unlike traditional equipment loan products, most lease programs will allow you to include the costs of installation and freight into the lease financing total, once again saving on your out of pocket costs. The ability to finance these “soft costs” can be the difference between making the capital investment or not.
Because the lease company owns the underlying asset and specializes in financing the asset type, there is considerably less red tape to go through in the application process. And for smaller ticket items, approvals can be accomplished in a matter of hours with very little paper work involved. More support is required for larger purchases, but compared to a traditional bank application the degree of complication and time required pales in comparison.
Conserve on cash.
In addition to the cash saving features mentioned above, most leasing companies will allow you to purchase an asset for cash and then turn around and sell it to the lease company in return for an equipment lease. There may be times when you can get the best deal with a cash purchase. And sometimes a great deal may not be around before you get financing approved. So this sale and lease back process puts cash back in your hands after the transaction has been completed, allowing you to take full advantage of a cash transaction.
In some cases, you may have even had to use your line of credit to buy the asset in the time you had to work with. Similar to the above cash purchase, the acquired asset can be sold to the leasing company in return for an equipment lease with the proceeds from sale being used to bring your line of credit back down and making the funds available for other operational requirements.
If you’d like to get more information on equipment leasing, please give us a call and we’ll get all your questions answered.