Tag Archives: business loan

Equipment Leasing vs. Equipment Loans, which is better?

Equipment Leasing vs. Equipment Loans, which is better?

Lease Loan
Application Process
A lease application can be as little as one page
for as much as $150,000 worth of equipment. Approval can occur within 24
hours.
Lenders
tend to require multiple financial documents before reviewing loan
applications for approval, such as tax returns and financial statements. This
process can take several days
Costs Covered

Leasing
covers the entire cost, including the equipment, tax, shipping and handling,
installation fees or any other expense associated with the equipment.

Loans
usually finance a portion of the equipment cost, neglecting excess costs in
acquiring the equipment such as equipment tax, shipping and handling and any
installation fees.
Types of Equipment
A lease
will generally approve any type of equipment needed, regardless of its
condition or whether it is new or used.
Lenders
may be skeptical about financing equipment they are unfamiliar with, or
equipment with low collateral or potential diminishing value.
Down Payments
There
is no down payment. The first payment usually entails the first and last
months’ payments
A down
payment is required, separate from the amount covered in the loan. The first
payment usually entails a down payment and the first month’s payment.
Interest Rates
The
interest rate is fixed. Each payment is inflexible, being determined at the
beginning of the lease. This simplifies budgeting, since lease payments are
not susceptible to change.
The
interest rate fluctuates. Payments may grow more or less expensive as the
market changes, making it difficult to determine how much capital to dedicate
to loan payments for a given fiscal year.
Collateral Requirements
Leasing
requires no collateral assets aside from the equipment being leased. A lessor
is only legally concerned with that aspect of the business being financed.
Banks
often claim other equipment or real estate of the company as collateral to
secure the loan. This can prove costly if the borrower defaults on a loan, as
more than just the financed equipment is at stake.
Equipment Ownership
Leased
assets do not appear on balance sheets, since the equipment is owned by the
leasing company. This can benefit a company’s financial ratio.
The
equipment is owned by the borrower and appears as an asset on the balance
sheets, which incorporates a degree of liability.
Additional Covenants
No
extra agreements are made between the lessor and lessee. If payments are made
on time, the lessor cannot demand immediate payment of outstanding debt or
reclaim the equipment.
Extra
covenants might be a part of a loan agreement. If any extra agreements are
broken, a bank might demand full payment of the remaining balance on the
loan, as well as impede use of the equipment being paid off. Future borrowing
may also be restricted.
Tax Benefits
A lease
usually allows for tax deduction of entire payments made toward the lease. If
the equipment keeps its relative value during the lease and is purchased at
the end, deductions can be made on depreciation thereafter.
A loan
usually allows for tax deduction on a portion of the loan as interest. Tax
deductions can also be made on the amount of depreciation attached to the
equipment. A borrower cannot deduct entire payments made on a loan.
End of Borrowing Term
At the
end of the lease term, the lessee may choose to transfer the burden of
equipment depreciation to the lessor or to keep the equipment. Purchase options
for as low as $1 are offered.
At the
end of a loan, the borrower owns the equipment and bears the risk of
equipment depreciation. If the equipment becomes obsolete during the duration
of the loan, it is still up to the borrower to make payments and dispose of
the useless equipment.

WHEN FRIENDS AND FAMILY HELP FUND YOUR BUSINESS

Small Business Equipment Lease

WHEN FRIENDS AND FAMILY HELP FUND YOUR BUSINESS

More than 85 percent of all startups are funded by the entrepreneurs themselves, or their friends and family. But getting funding from those close to you is a slippery slope. Gratitude notwithstanding, this is a business transaction, and with that comes certain expectations and concerns.

The first, and most vital, decision you’ll make when reaching out to family and friends is whether you will offer an equity interest in return for funding or just take a straight loan. Many experts advise sticking to loans, which have far fewer strings or conditions attached than an equity interest. Once the loan is paid back, that’s the end of the deal. With an equity interest in your business, the person providing the funds may want some say in its operation. This might not be feasible for a variety of reasons, be it expertise, personality, or proximity. Borrowing is cleaner and, as long as your business works out, far less problematic.
Loans
With any loan, provide a written contract that includes an investment letter specifically stating all terms of the loan, any applicable interest rate, and what happens if you default. Also note who approached whom about the financing.

An even better solution is to ask a family member or friend to serve as a cosigner for a loan rather than directly providing money to your business. If they can put up an asset to back your loan, the only thing they actually need to provide is a signature. This is a particularly attractive option if the person providing the financing is retired and doesn’t want to part with the cash.

Equity Interests
You may be fine with forfeiting a bit of decision-making freedom to your new equity partner, but know that setting up an equity transaction is far more involved than getting a loan. Make sure you have the time to handle this transaction properly.
Using a lawyer to guide you through an equity transaction is essential. First, you need to put a value on your company, factoring in assets and potential to generate revenue, and eventually profit, before multiplying that total by a common number for your industry. It’s also advisable to structure the company as an S corporation or a limited liability company, as these structures allow investors to deduct corporate losses on their personal income taxes.
Most significant, though, is to make sure you comply with federal and state securities laws. A common mistake is not properly disclosing risks to nonaccredited investors, defined by the Securities & Exchange Commission as those with a net worth of less than $1 million or an annual income of less than $200,000. There are exemptions, known as de minimis exemptions, which your lawyer can verify.
Final Considerations
In both loan and equity scenarios, a common mistake is overvaluation. Obviously you won’t try to treat your friends or family unfairly, but you may be unsure of your future company’s appropriate valuation, and your friends or family will almost certainly know less than you do. Driven by the optimism required for success often unintentionally leads entrepreneurs to overvalue the business. If you budget your future expenses based on an incorrect 20 percent overvaluation, you’ll be 20 percent short when it comes time to pay back the loan or pay a share of the equity holding, making for an awkward dinner conversation at the next family get-together.
Before accepting any of these means of support, stop and ask yourself if you will be able to fulfill the promises you’ve made. You’re not just checking yourself but the people financing your idea as well. Are they clear and comfortable with all the terms of repayment? And perhaps most important in this transaction, will your relationship survive if your business does not? If you can answer yes to each of these, say thank you and get your business up and running.