Equipment
How To Get Approved For Equipment Financing
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Many businesses require equipment for their everyday functioning. The cost of purchasing this equipment can be really high sometimes. Companies that can’t afford the cost of purchasing the equipment have to look towards other methods to get the necessary equipment for their business.
Equipment leasing is the way out for businesses like this. It allows businesses to acquire necessary equipment without having to buy them. All the business needs is a leasing agreement. Equipment leasing is a way forward for many small businesses as they do not have to spend the high cost of purchasing the equipment and can save cash for other uses.
Lease agreements can be gotten from equipment manufacturers, banks, dealerships, and some other financial companies. The payments required for equipment leases are usually not as high as that of loans. This makes equipment leasing very cost-effective for many business owners and small companies. Statistics show that about 80% of companies in the United States lease part or all of their equipment.
Leases that contain balloon payments at the end of the period are not always favourable to businesses, and it is more advisable to get equipment leases with closed ends. Equipment leasing allows businesses to save costs, benefit from tax advantages, preserve company capital, and access to recent equipment and tools.
What Is Equipment Leasing and How It Works
Equipment leasing is the process of getting necessary equipment a business needs through rent from a financial institution. The financial institution has ownership rights over the equipment, but the usage is by the company. The institution charges regular payments from the company to cover the lease period.
Businesses engage in equipment leasing to reduce the amount of capital spent on purchasing tools and machines for the company. When starting a business, the cost of purchasing equipment can be incredibly high. Obtaining an equipment lease is a fitting solution for this.
Equipment to be leased can range from computers to heavy machinery. Equipment leasing is more prominent in businesses that need a large number of tools and machines for their everyday running. Equipment leasing helps such businesses avoid the enormous costs accompanying equipment purchase.
Any company that leases equipment is required to pay a specific amount for the continued use of the equipment. Equipment leasing is especially fitting for companies that need to update their equipment regularly. They won’t need to buy equipment multiple times and will have access to the needed equipment when needed.
Various kinds of equipment leases have different functions. Some leases may require only fixed regular payments, while some contain balloon payments at the end of the contract. At the end of some leases, the equipment ownership rights can be transferred to the business owner. Equipment leases can be of two categories:
Capital Lease
In this kind of lease, the business obtains ownership rights of the equipment at the end. A capital lease is especially suitable for businesses that require expensive equipment for the long term. This is the most popular form of equipment lease, and many companies in the world use it.
For capital leases, the business bears the majority of the benefits and setbacks that comes with the equipment. Most business owners choose this kind of lease as they get full ownership of the equipment after signing a bargain purchase agreement with the institution they’re leasing from.
Operating Lease
An operating lease is much different from a capital lease. In the case of an operating lease, the business does not receive any of the benefits or burdens associated with the operating lease. The only thing the business does is rent the equipment from the institution.
Ownership rights remain with the leasing institution in the case of an operating lease. The company does not get any rights over the equipment even after long periods. This form of leasing is beneficial for businesses that tend to change the equipment they regularly use as they won’t incur multiple costs.
There are several ways to secure an equipment lease. Various financial institutions and equipment manufacturers deal with equipment leasing. These institutions lease equipment to companies and charge regular payments from them to make a profit. Some places to get equipment loans are:
Banking Institutions
Banking institutions and firms associated with them often offer equipment leasing services to businesses in need. Not all banks offer equipment leasing agreements but those that do provide better advantages to companies looking to get a leasing agreement. Such banks provide services like lower payments and better customer service.
Equipment Dealers
Companies that deal in equipment and distributors are also a good source for getting lease agreements. These dealers will help business owners acquire the needed equipment lease by negotiating with an independent leasing company for the business owner.
Independent Leasing Companies
Independent leasing companies specialize in providing lease agreements to various businesses. These companies come in various sizes depending on the business's needs and offer various financing options for the business needing the equipment to pick from.
Brokers
Brokers are not common when it comes to equipment leasing. However, they do exist. The work of these brokers is to serve as an intermediary between a business and the institution providing the lease. The broker connects the two related parties while charging a small fee for their service.
Equipment leases have specific durations for which they last. In most cases, it is usually around three, seven, or ten years. After this period, the company is expected to either renew its lease or purchase the product if they want to continue using it. Equipment leasing is mainly beneficial to small-scale businesses.
After a company finds where to secure an equipment lease, the next thing that comes to mind is the necessary qualifications necessary for obtaining the lease. Some criteria are looked at by the financial institution leasing the equipment before the lease is granted to the company. If a company possesses the criteria to obtain the lease, it can negotiate terms with the leasing company.
The leasers check things like the business credit score and history before granting the lease to the business. They view these things so they can find out whether the business has the capability to make the required payments for the equipment lease. The rates of different companies vary depending on where the lease is being secured.
Credit scores also determine the rates you are offered when requesting an equipment lease. That means the better the credit score, the better the rates the company is offered. Some leasing companies specialize in different things, so finding the one that fits well for your business is very important.
The best thing about equipment leases is that they don’t reflect on your credit report. Hence, they do not affect the company’s ability to receive loans. That means that a company can apply for other loans while under an equipment lease. The two will not affect each other in any way. Benefits of equipment leasing include:
Cost efficiency
Getting an equipment lease is very cost-efficient, especially for small businesses. Most of the time, companies do not need to make a large initial payment regarding equipment leasing. This helps the company save money and spend less on providing equipment.
Equipment Upgrades
When a company rents equipment from a leasing company, they can easily update their equipment to better ones at any convenient time. This is especially helpful for companies that require regular equipment changes. Once equipment gets obsolete, it can be replaced.
Easy Scalability
When equipment is leased instead of purchased, it makes it easier for the company to increase the scale of its business later on. Businesses grow with time, and the amount of equipment also needed increases. Switching equipment for ones that can carry out a more significant workload is more accessible with equipment leases. Instead of selling old equipment to purchase new ones, companies can lease and change equipment easily.
How To Get Leasing Approval
Getting a leasing company to grant your company a leasing agreement is not direct. Various factors need to be checked, and different criteria the company needs to meet in order to be eligible for the equipment lease. Once a company meets the required criteria, it becomes easy to get the equipment lease.
Leasing companies and brokers want to minimize their risk when lending. Hence, they have a look at the company’s ability before deciding what rates to offer to the business. If the business has a good capability, the leasing company will have no problems granting the equipment lease agreement. The conditions that determine whether a company is qualified for an equipment lease include:
The Company’s Credit Score
One thing that is common among all types of lenders and leasing institutions is that they all check a business credit score before granting any form of loan or lease. The same thing applies to equipment leases. The business's credit score is a huge determinant of whether the lease will be approved.
A credit score is the financial world’s method of determining the level of financial trust they can grant to a business. The better the credit score, the more likely it is for the business equipment lease to be granted. Likewise, if the business credit score is low, the equipment lease agreement might not be approved.
The business credit score is what is evaluated when it comes to equipment leasing, not the owner's personal credit score. The business credit score runs similarly to an individual’s credit score. It can also be raised to the required level. Making regular, timely payments and outstanding balances on business loans help improve credit scores.
Hence, even if a company’s credit score does not reach the required mark of leasing companies, the business can strive to improve its credit to meet the requirements. Observing their credit reports and terminating unnecessary lines of credit help improve a business credit score.
Business Credit History
A business's credit history is significant as it closely relates to the credit score of the business. The better the business's credit history is from their credit report, the more improvement they see in their credit score. When borrowing or leasing equipment, the credit score is very essential.
Brokers and leasing companies also pay attention to a business's credit history before granting lease agreements. If the company has a good history of paying back loans and making debt payments on time, it will be easier for the broker or leasing company to grant the business a leasing agreement.
There are some things leasing companies watch out for in a business credit history. If a company has experienced bankruptcy, debt consolidation, consumer proposals, or missed minimum payments within five years, they are very likely to be denied an equipment lease agreement.
Business Age
Most leasing companies like to look into the past years of a company before granting a lease agreement. Companies that are recently started tend to have a disadvantage in this aspect. However, it does not mean that they will be directly rejected. Depending on the leasing company, they might choose to decide on other factors.
For newly registered small businesses, it is advisable to apply for smaller equipment leases. If the lease doesn’t have high requirements, the leasing company will be more inclined to approve the lease agreement. The leasing company will view the possibility of loss as bearable and can approve the equipment lease.
A new business owner might also need to submit their personal financial history. If the business owner has a positive financial history, such as tax documentation and bank statements, the leasing company might consider approval even if the business is just starting.
Intended Equipment Use
Lease brokers and companies also consider the intended use of the equipment before granting approval to the business. They tend to ask things like what the company will use the equipment for? How will it help develop the business, and does the company really need the equipment?
These things might seem unimportant to other people, but to brokers and leasing companies, they decide whether the business gets a leasing agreement. If the business owner provides suitable replies, the leasing company will decide whether to grant the equipment lease. It also shows the confidence and growth potential of the business.
Some equipment leasing companies require businesses to prepare a presentation on what they need the equipment for and how they plan to use it before granting a lease agreement effectively. The way the business presents its answers will determine whether the equipment lease will be granted or denied.
Business Cash Flow Performance
In some instances, leasing institutions might be more lenient to companies with weak credit scores but high business cash flow performance. Sometimes, a business might not have a great credit score, but their credit records might not be bad either. In situations like this, the company’s cash generation can be reviewed.
If the company's financial capability is deemed high enough by the leasing company, they can decide to approve the equipment leasing. However, if the business has an inferior money-making ability, the leasing company will most likely decline the lease agreement.
The leasing company or broker will review the company’s recent financial statements and tax records, and if they find it to their satisfaction, the equipment lease agreement might be granted. This is a way out for newly starting companies with negligible credit records.
Equipment Finance Canada is a firm that offers equipment leasing to businesses. They are a leasing company where businesses can get their equipment leasing agreements. All the business owner needs to do is fill out their prepared form to get semi-qualified for the leasing agreement.
At Equipment Finance Canada, approval of the lease, financing, and tax benefits is made very easy and happens quickly. They specialize in providing debt financing solutions to businesses and industries. Equipment Finance Canada ensures that all businesses receive the best approval for their equipment leases.
Conclusion
The cost of purchasing equipment needed by a company can get really high at times. Some companies are required to change their equipment regularly. For such companies, buying equipment is even more costly. Equipment leasing allows a company access to the necessary equipment for a price without having to purchase the equipment.
An equipment lease could be a capital lease or an operating lease. Equipment leases usually last three, seven, or ten years. To get approval for an equipment lease, a company has to fulfill specific criteria set by leasing companies, such as a high business credit score, good credit history, a good reason for the lease, and sufficient cash flow generation.
References
https://www.britannica.com/topic/lease
https://www.usa.gov/credit-reports
https://www.researchgate.net/publication/230443760_The_Fundamentals_of_Equipment_Leasing