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Equipment Leasing 101 for Start Up Businesses

Posted On: January 12, 2023 author Paul Kendall

As a start up business, it can be challenging to get things up and running from scratch. Most traditional lenders and banks won’t offer you a hand to provide you with the financing you need to get your start.

This isn’t surprising, as most major financial institutions are focused on ensuring that they’ll make a return on their investment.

And when most businesses fail within the first 2 years, outside financing can sometimes seem absurdly expensive. Even when you’re looking for equipment leasing for start up business, you may encounter higher-than- average equipment leasing rates if you don't have perfect credit, worth a lot of money and have a lot of money saved up you may not qualify for the lowest start up loan rates. 

Let’s explore some of the major characteristics of equipment leasing for a start up business and what you can do in your own business.


Definition of a Startup

Generally speaking in the world of leasing, if you go to look for financing, and they ask how many years you’ve been in business: if you say anything under 2 years, you’ll be considered a “new business,” or a “startup.”

Anything above 2 years is (to most financiers) is no longer a startup, because this seems to be the tipping point for many businesses. The trend is that the longer a business can hold on, the less likely they are to fail, and this is why 2 years is the “minimum” amount of time for most equipment leasing companies need before no longer classifying your business as a startup business.

But you can still seek out equipment leasing for start up business, regardless of how new you are.


New Businesses - Eligible for Equipment Financing?

The short answer is yes.

The more involved answer is: yes and no. It all depends on where you go to get your equipment financing.

As a new business, you’ll have virtually no luck with a bank or other traditional lender, as well as manufacturers of equipment, due to the risk associated with newer businesses. The only saving grace would probably be near-perfect credit score, but even then it’s not guaranteed.

With equipment leasing companies, you can get your equipment leasing for start up businesses considerably easy at the expense of zero to two payments down, terms up to 60 months. In addition to comparatively higher equipment financing rates, more money down or collateral for people starting up a restaurant with bad credit.


“I have bad credit, can I still lease or finance equipment?”

Thankfully, your “time in business” (i.e., being a startup) isn’t the only factor that goes into an equipment leasing companies decision when you’re looking for equipment leasing for a start up business. Equipment lessors are also looking at your cash flow, money saved up, partners, cross corporate guarantors from your other businesses and other financial factors of your current business.

For those that have good credit, it’s relatively easy to get the equipment leasing they need for a start up business that you, even if you’re just now opening your doors for the first time. You’ll still have to pay higher rates than a company that’s been at it for multiple years, but it ends up being one of the better rates available for a startup.

But for those that don’t have near-perfect credit (i.e., poor credit or bad credit), that doesn’t mean that you’re automatically out of luck to get equipment leasing for a start up business.

Typically how it works (and it will vary based on the equipment leasing company), you’ll be expected to put up some form of collateral (house, land or larger initial security deposit) and are likely going to have higher monthly payments than someone with a higher credit score. 

Everyone's situation is different but we've seen them all. 

Regardless of what your credit score is, as long as you’re committed to getting the equipment leasing for a start up business that you need, you can find a way.


Cost of Financing or Leasing Equipment

There are many variables that go into determining the overall cost of financing or leasing equipment.

Price of Equipment - The more expensive the equipment, the higher the total cost. However, as equipment price increases, overall financing cost-per- dollar decreases (i.e., it’s more cost- effective in terms of finance/lease cost to purchase higher end equipment).
Credit Score - Unsurprisingly, the better your credit score, the better time you’ll have with getting better financing rates for your business.
Time in Business - As a startup, this is essentially null. You’ll need to rely on other factors to help you improve your financing rates.
Source of Finances - Equipment Financing companies are generally the most “affordable” option for financing equipment, Local Banks do have specials and you can get low rates. Many credit cards run 0% promotion and balance transfers  but also the hardest to qualify for the bigger amounts you may need. Some manufacturers may provide 0-9% financing if you purchase directly from them.

Third parties offer equipment leasing for start up business as a great middle ground for those that need it.


Equipment Loan vs. Equipment Lease - What’s the Difference?

Getting an equipment loan is probably the “most popular” option when it comes to businesses, due to Section 179 benefits. Business owners structure their agreements as a sales contract, equipment finance agreement or $1 buyout lease.

You can goto a bank or an equipment financing & leasing company for both options but it’s generally very hard to actually qualify for financing through a bank. There’s a lot more paperwork, approval rates are not very high, it takes longer to get an approval or denial, how you spend your money may be restricted, and it’s not as cost-effective in terms of tax benefits.

Equipment leasing for a start up business or other businesses, by comparison, is more expensive, but more realistic for many businesses, especially startups. Equipment leases are much more flexible, less paperwork, higher approval rates, faster qualification processes, tax benefits, and the option to choose whether or not you “own” the equipment or pass on it when the lease is done.


How to Qualify for Equipment Financing

The first thing to keep in mind when looking for equipment financing for a start up business is that your credit score should be over 700 and have at least 5 years of credit history with at least 5 credit grantors. Loan amounts up to $100,000 in some cases with just a simple one page application. Loan amounts over $100,000 will require a full financial package.

For financing new businesses, you can look for credit based equipment finance (financing based on your credit score), cash flow financing (where your credit score is ignored if you’re operating a successful business), collateral financing (where you provide something significant upfront in the event where you cannot pay the lender back), or story based financing (where any or all financial factors may be ignored, so long as a lender sees a reason to finance your business).

How to Qualify for Equipment Leasing

 Your credit score doesn't have to be as high for equipment leasing. Lenders will consider you with over a 650 fico for equipment leasing app only up to $150,000 in some cases. Over a full financial package could get you all the equipment you need to start your business. 


Tax Benefits of Equipment Loans and Leases

Figuring out taxes and how it all ties in can be overwhelming for new businesses. This is normal for first timers. When trying to get equipment leasing for a start up business, there are some tax advantages to getting equipment loans or leases.

On an equipment loan. When business owners pay cash or utilizing a non tax lease ($1 buy out, EFA) Section 179 tax code comes into help companies accelerate depreciation and write off the entire purchase price in year 1 off their taxable income, or they can depreciate the asset over its useful life and take a small tax break each year.

With an equipment lease where there is an open ended buy out with no obligation to buy the equipment business owners can write off 100% of their monthly payments off their taxable income each year.

This will give you the biggest tax write off year after year as long as you're leasing your equipment. At the end of the term you can renew the lease, negotiate a final cash payment with the lessor or return the equipment and upgrade to the latest and greatest equipment. 


How Does it All Work?

Thankfully, it’s not too hard to get equipment leasing for start up business like yours. You’ll need to find a leasing company that specializes in leasing equipment. When you search around online for equipment leasing companies in your area, you’ll want to make sure you’re prepared with all the data you’ll need to get started:

● What you’re purchasing and why you need it for your business.
● Estimated cost of what you want to purchase.
● Your credit score and history. 
● How long you’ve been in business (unless you haven’t opened your startup yet).

These will be enough to at least get the dialogue going between you and the equipment leasing company.

If things look like they’re going well, you’ll likely be asked to send a signed and dated credit application and equipment list to get pre-qualified.

For larger amounts or financing your previous 3 months of bank statements, a couple years of tax returns and a personal financial statement.

If you’re approved, then you’ll be asked to make your first and last payment (or a security deposit, depending on your agreement).

All in all, the entire process can be done in just a few business days or less. So if you’re looking for equipment leasing for start up business, you can get the funds you need very quickly as long as you don’t run into any snags.

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