Financing Capital Equipment
Stringent lending requirements could make financing capital equipment a formidable challenge, especially in a volatile market. When stocks plummet, banks and conventional lenders are less inclined to loan money to businesses seeking to purchase or lease new equipment and machinery. For that reason, entrepreneurs seeking to start new enterprises may find funding fledgling ventures difficult. Financing startups is a high-risk undertaking to which not many banks and commercial lenders want to commit, especially in light of an uncertain fiscal future. And the fear is very real: most startups fail in the first three to five years, leaving lenders and borrowers up the proverbial creek without a paddle. In a sink-or-swim economy, no one wants to wind up high and dry. In the event of failure, owners and investors will certainly lose; and loans for which owners vowed to repay will go into default. "Better is it that thou shouldest not vow than that thou shouldest vow and not pay" (Ecclesiastes 5:5). But in spite of economic woes and stocks that take a nose dive, companies still have a need for capital expenditures. Corporations must keep up with consumer demand for high quality manufactured products; and in order to remain competitive, businesses must invest in improving existing operations. Updating machinery to keep pace with demand; purchasing new vehicles for corporate fleets; or installing computers, servers, and audiovisual aids are some valid reasons for seeking funding.
While businesses have needs, banks and other financial institutions may be reluctant to extend lines of credit and loans to fund capital improvements. Startups may find investment companies which specialize in financing capital equipment in exchange for limited ownership in a new venture. Companies which extend lines of credit to new enterprises, structured as a loan or lease, are crucial to getting the business off the ground. Capital expenditures can include PCs, servers, laptops, copiers, printers, and telecommunications devices. Office furnishings, company vehicles, trucks, and machinery are also included. General contractors may obtain venture loans or leases to purchase heavy equipment, such as backhoes, excavators, or front end loaders. Nearly any significant item used in the day-to-day operation of a business is considered capital equipment.
Owners of small and large corporations have the option of financing capital equipment over a long or short period of time. Venture funds which extend long-term loans may require that entrepreneurs use the machinery as collateral, but entrepreneurs retain ownership throughout the terms of the contract. Long term loans act as installment agreements; but buyers may have to make a final payment at the end of the term to hold a clear title to property. Conversely, financing capital equipment on a per-job or short-term basis may be best structured in a lease agreement. Leases require monthly payments plus interest; and entrepreneurs essentially rent computers, machinery, or tools for a shorter period of time. At the end of the lease agreement, lessees have the option of making one final buyout payment which transfers ownership, or new agreements may be drafted which extend rental terms. Businesses may also prefer to lease another piece of equipment, especially if the original item becomes outdated or upgrades are necessary due to a higher volume of usage or wear-and-tear.
There are pros and cons to financing capital equipment on a short-term venture lease versus a long-term loan. On the plus side, financing a loan for up to ten years enables new businesses a chance to get established and start making a profit. Venture capital companies which extend lines of credit for startups realize that building a new enterprise from the ground up takes time. They are not only willing to lend money for financing capital equipment, but as part owners, lenders will also provide limited management with an eye toward increasing productivity and profitability. Lending money and administrative oversight to a fledgling enterprise increases its chances of surviving the first three years when most new companies tend to fail. On the other hand, a short-term venture lease ensures that operating capital is not expended to make major equipment purchases. Owners can get in and out of a lease quickly without a major strain on operating funds. Flexible lines of credit enable businesses to purchase or lease machinery, computers, or furnishings over a limited period of time and stay in black. Long term loans also help companies control overhead while establishing a good payment history with lenders, as profit margins gradually increase.
In apply for financing capital equipment, startups need to develop an ironclad business plan which demonstrates how equipment or machinery will be utilized to make money. A demonstrated need, plus a detailed plan may be able to convince loan officers to relinquish funds to keep the company competitive. Owners also need to establish projections for future purchases and provide stock options to venture capital companies which serve as an incentive for funding. Investors should feel confident that lines of credit or leases will attribute towards a company's net profit and provide a good future return. Consulting with financial planners and accountants will enable new owners to develop a distinctive marketing plan; anticipate present and future expenses; and determine other sources of funding to offset short- or long-term leases or loans. Making a strong case for financing capital equipment and repaying loans and short-term leases prior to approaching venture capitalists will give lenders added assurance that owners have done their homework and are serious about honoring financial obligations.
Capital Equipment LeasingAny business that is considering capital equipment leasing will need to weigh the pros and cons of obtaining a lease as opposed to making an out right purchase. Many companies are discovering that there are a number of major benefits associated with leasing expensive machinery and other business needs. When seeking a bank loan to pay for equipment, most companies will need to come up with a hefty down payment. Lease agreements usually offer one hundred percent financing and require no down payment whatsoever. The budgeting process is made easier as well. Loan payments can fluctuate over the life of the loan depending on interest rates and other concerns. A lease payment will generally stay the same throughout the terms of the original agreement. Whenever a large loan is taken out, the debtor will see a dramatic decrease in their line of credit that is available. With leasing, this is not a problem. Lines of credit are generally not impacted in any way by a lease agreement. Leased machinery will work as well as machinery that is owned. So why take on the extra debt when the same benefits to a particular business venture can be achieved through a lease? In some cases, a lease agreement may offer tax benefits that are not available when items are purchased. Many business owners feel that offering up large amounts of money to purchase machinery does not make sense and can be detrimental to a company's bottom line. For this reason, capital equipment leasing can be a better choice.
Since income and available funds can fluctuate greatly throughout the year, pouring large amounts of money into paying for machinery can be a huge and costly mistake. Choosing capital equipment leasing rather than assuming huge debts can mean the difference between business success and failure. Most vendors and financing companies can work out a lease agreement that best meets the needs of a specific business. The length of a lease can vary and may last between one and five years. Larger equipment will generally have a longer life expectancy and may carry a longer lease as well. With a lease agreement expenses such as installation, freight costs, maintenance, and software can be rolled into the cost of the lease. If obsolescence is a concern, upgrades can usually be factored in to a lease agreement that will address such concerns. There are several different types of capital equipment leasing agreements that are generally available. These agreements could include a capital lease, an operating lease, a master lease, and a deferred payment lease. Capital and operating leases are basic, full pay out agreements. The main difference between these two agreements is that an operating lease allows the expense to be deducted on taxes. A master lease allows for additional items to be leased under the same terms at a future date. A deferred payment agreement allows new businesses to postpone full monthly payments for a brief time.
A variety of organizations can benefit from selecting capital equipment leasing. In addition to businesses, governments, municipalities, and other associations might choose this option as long as their credit scores qualify them. Credit worthiness is determined by a number of factors including the overall financial condition of the organization, the length of time that the venture has been around, scores from standard credit rating services, payment histories, and references from banks. While no down payment is generally required when signing a capital equipment leasing agreement, some vendors may require that clients come up with one or two advance monthly payments at the beginning of a lease. Purchase options are usually outlined in the original terms of the lease and should be clearly explained to a client by a representative of the leasing company. Most leases will commence after machinery and equipment has been delivered and installed. Leased machinery is generally regarded as the property of the vendor and not the lessee. For this reason, the lessee will not need to pay property taxes on the equipment. Lessees are, however, usually expected to cover the costs of insuring any leased items. These policies can be attained separately, or can be included by the vendor in the original contract. Most vendors will also allow clients to request a buy out quote at any time during the life of the lease if they so desire. Leasing companies will generally allow clients certain add on and upgrade options. Canceling a lease agreement usually not an option.
Before choosing a provider of capital equipment leasing, there are a few questions that a potential client may want to ask. The questions could include an explanation of all costs and what kinds of additional options are included in the agreement. Asking the right questions can help to ensure that the vendor that is chosen will be a good fit for a particular business. The value and support of a good friend is mentioned in the Bible. A man that hath friends must shew himself friendly: and there is a friend that sticketh closer than a brother. (Proverbs 18:24)
Once a decision to go with capital equipment leasing has been made, a reputable vendor will need to be selected. Choosing how to finance the lease is another important decision. The EFLA, or Equipment Leasing and Finance Association can help a potential lessee make these crucial decisions. Including accountants and tax consultants in on these decisions can be a good idea. Whatever choices a business might make, the option of leasing needed machinery can be a cost effective way to move forward.