Before You Buy New or Used Equipment: What You Need to Know
As a business owner, the decision to buy new equipment becomes a priority when a piece of critical equipment breaks down and it costs as much or more to fix it as it does to replace it. Or your equipment becomes obsolete and the new technology will allow you to increase your capabilities. Or…the new equipment will make it easier to grow your business – serve more customers, produce more products faster and of a higher quality. Each is a valid reason to buy new equipment. Now, for the big question: How Shall I Pay for It?
Cash, Bank Loan, or Lease?
1) Leasing conserves your capital
2) Leasing preserves your bank lines of credit
3) It’s easier to qualify for an equipment lease than for most bank loans
4) Lease payments, generally, are not reported on your personal credit bureau (The credit inquiries are, but the actual borrowing is not.)
Lease Company or Bank?
Answer this question: Who is looking out for your interests when you apply for a loan or an equipment lease? Banks talk a good game, but the days when you could talk to a real loan officer, someone you knew took an interest in your business are gone. The bank’s first commitment is to its own bottom line.
Big banks are drifting away from serving smaller customers. They don’t want to deal with transactions below $50,000 or in some cases $150,000. My lease company, for example, finances deals from $5,000 to $1 million.
Banks often require 20 to 30% down. Lease companies will usually only ask for first and last payment in advance, which equates to about 3-5% down. Banks will want a blanket lien against everything, business and nonbusiness assets. Lease companies generally only take a lien against the equipment that is the subject of the lease.
Banks want you to move all of your business to them if they are going to give you a loan (if you are not already doing business with them). A lease company doesn’t care where you bank as long as it’s not a bank outside the US. A lease company doesn’t force you to use your line of credit or take out a second mortgage to purchase your equipment. Why would you want to use up your liquidity to buy a piece of equipment and expand and then not have that liquidity to pay for operations until the new income stream starts?
Don’t get me wrong, you still want to have and maintain a strong banking relationship for the other financial services your business needs. But keep in mind; bankers have a tendency to think in very narrow terms. Creative financing solutions are not their strength.
Relationships Make the Difference
What you need and want is that personal relationship. You want to work with someone who takes an interest in you, the customer, and does what’s best for you and your business. I recommend working with someone you trust. A reputable lease company will happily provide information about leasing and give you a best estimate quote, without requiring a deposit or application. They will clearly explain the terms of the lease they are offering.
The three major things lease companies look for when considering your application are:
a) time in business
b) credit score and
c) average daily bank balances.
To proceed further you’ll make a formal application. And you should never have to pay an “application fee.” Once your lease is approved, all the terms of the lease should be clearly explained to you. You should also receive your end of lease option in writing. If you don’t get it in writing, ask for it prior to executing any documents.
I personally believe a good lease company takes an interest in their clients and does the best job possible for those clients. That’s how I’ve run my business for the past 30 years. It is the reason my clients come back time and time again.
I’m the first to admit that there are some lease companies that don’t care about their customers. They’re only interested in churning out transactions. There are unethical companies that will imply your lease is a low rate and then later you’ll discover there is a large residual (end of lease) payment that translates into a much higher rate. Also, be aware of companies that ask for advanced fees to apply or send you a letter approval with the proviso they will continue if you send them a deposit refundable (after expenses). Ethical lease companies don’t do that. We make our money when the transaction closes.
Tips to Make Applying for a Loan,
Lease or Other Credit Easier
1. The longer you are in business the better. If you are starting in your garage and then you plan on stepping up to the big time, don’t delay registering your business with the state.
2. If you are a start-up, immediately open a business bank account.
3. Keep money in your business account. We look at bank balances to make sure there is enough cash flow to make the equipment lease payments. For example, if you want to lease $75,000 worth of equipment we would like to see average balances of $7000 on up. Lenders that don’t care about your average daily balance simply charge a higher rate.
4. Pay attention to your personal credit. Automatic declines are unpaid child support, open tax liens or judgements, a recent repossession or default on student loans.
5. If you have open account, such as credit card or car payments, keep the accounts current and paid promptly.
6. Don’t over-use your credit cards. Generally if you have high revolving debt, it will drag your bureau score down and if you have used more than 50% of the outstanding authorized amount you can charge, that will also drag your score down.
7. Don’t drain your bank accounts. Lenders want to see a healthy and consistent average daily balance.
8. Be able to demonstrate your business is profitable.
9. The equipment you wish to lease must be essential to the operation of your business. A forklift for a doctor’s office doesn’t make sense, but a forklift for a warehouse does.
The Bigger the Deal –
The More Info You Need to Furnish
If your funding request is for more than $100,000 or $150,000 for “hard assets” you will have to provide tax returns and other financial information.
This leads to another common trap, your CPA is so good that you don’t show a profit. I’ve heard many times, “but if you add back in the depreciation we made a profit.” Unfortunately, it doesn’t work that way when you apply for credit. Like most people, I don’t want to pay more taxes than I need to. As a leasing professional, I have to demonstrate that you can pay your lease payments. The lenders want to see that you have a business that makes a profit.
Whether you wok with a bank or a lease company, we often look at comparable credit for larger deals. What the heck is comparable credit?
It is previous business installment borrowing that you have successfully paid off in the past for a period of at least one year. So, if you want $150,000, you should have previous business borrowing of $50,000 to $75,000. This is not a hard and fast rule, but it’s an issue I run into quite often.
Protect Your Credit Rating
Finally, you have to protect your credit rating by limiting the number of applications you submit for a particular deal. Yes, it is prudent to do a little comparative research. However, when you submit applications to several lenders the first thing they do is pull your credit bureau. Each credit bureau inquiry lowers your credit score by a few points. Sometimes one application can result in your credit bureau being pulled multiple times as it goes through processing. A reputable lease company should be able to give you a best “guestimate” as to terms and payment without accessing your credit report. Sometimes, there is an unknown that pops up in the credit review process, but if you are straightforward with the lease company, they’ll be in the ballpark. Do remember though an estimate is just that, an estimate. Expect minor changes.
Equipment leasing companies are not banks! And that’s why we can look at things differently. We don’t have to worry about our ratios or exposure to a particular client or business category. We have a much broader credit window. We can structure a lease to fit your specific needs. Pricing is based upon risk and collateral, not just how you fit into a set of predetermined rules. And we want to work with you over the long term. That’s why exemplary service and truly caring about our clients is the hallmark of our business.
Jim Phelps is the owner of Capital Equipment Leasing. He and his staff serve clients throughout the continental United States. Clients choose their vendors, choose their equipment, make their best deals, and take advantage of the benefits equipment leasing allows.
You can reach Jim at 503-890-0969,
or download an application at