Equipment Leasing- Due to the fact that most people associate "leasing" with consumer vehicles, there is a big misconception that equipment leasing is complicated and costly. This couldn't be further from the truth. Equipment leasing allows for some of THE MOST flexible business financing options around, and the possible TAX SAVINGS ARE IMMENSE! Take a second to get familiar with the various equipment leasing options and put this POWERFUL financial tool to work for you and your business!
Equipment leasing is a financial tool used by over 80% of US businesses today. Equipment leasing is essentially a loan where a lender/lessor purchases the equipment and then rents it back to the lessee at fixed monthly payments for a pre-determined number of months. At the end of the term, the lessee has the option to purchase the equipment for a pre-determined amount, keep the equipment and extend the lease, return the equipment, or upgrade equipment and begin a new lease.
The most common end-of-lease options are:
$1 End Option- With a "plain English" purchase option, the lessee must purchase the equipment for $1.00 at the end of the lease term. The $1.00 (or $101 for tax purposes in some state) purchase option is also known as a "full payout lease" or a "disguised purchase." This is an ideal option for business that KNOWS they would like to own the equipment at the end of the lease.
10% PUT- A "PUT" (balloon), is a pre-determined end-option based on 10% of the original financed amount. This allows the lessee to enjoy lower payments through the term of the lease, while still giving them the peace-of-mind knowing they still have a GUARANTEED end-option amount. This is ideal for businesses that know they want to own the equipment at the end of the lease term, but want to enjoy lower monthly payments.
FMV (Fair Market Value)- A lease structured with a FMV purchase option is perfect for any company seeking the MAXIMUM tax and accounting benefits that an operating lease can provide. Often times, the entire monthly lease payment can be deducted as an operating expense. This can greatly reduce tax liability at the end of the year. A business with a FMV lease has the option to purchase the financed equipment at the end-of-lease, at its current fair market value. FMV leases allow for the lowest monthly payments.
Alternatives?
Working Capital Loans- Working capital loans are important for the day-to-day operation of any growing business. The funds from working capital loans can be used to fund marketing campaigns, develop the company website, or hire your competition's top salesman! Working capital loans (especially larger dollar amounts) are often secured by a lien on a portion of the company's assets. Although working capital loans do allow for flexible use of funds, business and personal credit (of the business owners) must be in very good to excellent condition to qualify for some programs. It is always a good idea to be aware of your credit condition before applying for business financing. It might be a good idea to request a copy of your personal credit report, or Dun & Bradstreet (D&B) business credit report, months before actually applying... its better safe than sorry!
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