By James Phelps
If you look at the news, the economy is growing and banks are lending money again. But small and medium businesses are still being shut out. Recently a client called after a very disappointing meeting with her local bank. They were willing to lend her the money to purchase new equipment, but in addition to a personal guarantee, she would be required to put her home up as collateral for the loan.
“After all,” the relationship manager told her, “if you’re not willing to invest your business why should we?”
Most business owners incorporated so they would be able to protect their personal assets from business reversals. Most have put a great deal of their personal and family money into building their companies. When it comes to financing new equipment, the bank isn't your only option. Lease financing is more cost-effective in the long run and less cumbersome than a bank loan. You will never be asked to put your home up for collateral.
More than ever before, understanding your financing options is critical to ensuring your ability to keep pace with the changing business environment while managing your bottom line.
Let’s say you have a manufacturing company, and need to add equipment to increase production. The price tag is $75,000. First, most banks won't view this equipment as sufficient collateral. Because of that, on a loan of this size, they may require a second mortgage on your home or business property. In essence, you're pledging the appreciation of your assets (typically real estate) in return for assets that will only decline in value (equipment).
Next, they'll ask for what could be a substantial down payment and other fees. With these concessions, the bank may offer you a loan at current rates. When combining the down payment with loan fees, you could be looking at substantial upfront costs.
Keep in mind, if you need to shop for or go through multiple loan applications, each one of those will result in a credit inquiry, leading to a reduction in your credit score. When working with a reputable leasing company, you'll often be provided an idea of what your payments will be before a credit inquiry is made. It's strongly recommended that you only deal with leasing companies that will give you an estimate of payment without requiring you to make a formal application.
Lease financing, also known as capital leasing, is essentially a loan but doesn't come with the entanglements of bank financing. It's important to know the differences so you can make an informed decision about how you handle purchasing new equipment.
When financing an equipment lease, you'll have far more flexibility while also retaining control of your assets. Lessors make credit decisions based on cash flow and your ability to pay, versus collateral and security, enabling you to remain in first position on your properties. Lease financing allows you to secure a fixed rate of interest and is much faster than securing a traditional loan because a bank isn't involved in the transaction.
With lease financing, you're not financing the equipment, the leasing company is. In some cases, if your credit rating is good enough, the leasing company may finance a portion of the installation. If the equipment becomes obsolete, the lessor bears the risk, so it's easier and less costly to upgrade.
Weigh the Options
As you plan your next equipment purchase or facility upgrade, look at all of your options. The bank isn't the only financial resource available to you.
James Phelps is president of Capital Equipment Leasing Inc., headquartered in Beaverton, Oregon, and on the Web at www.leasingdollars.com.