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Buying or Leasing Equipment Fundamentals

If an already established business is looking to buy equipment it  is probably not a wise choice to pay for it outright, unless the business is cash rich. The only other option that may force an established business to buy equipment is that they have limited the  business to the type of financing that can be obtained. When I say limited options I mean merchant cash advance, because they are not filing acceptable financials, have not built the business credit and the owners personal credit is in the tank. 

The fact is that the majority of small businesses do not have the reserved cash to buy a substantial piece of equipment, and must look at financing options. Equipment financing/leasing does have credit score requirements, although down to a 550 FICO is acceptable all the other requirements must be met.  It is better to say the better shape the business is in with financials, business credit and/or personal credit the better the terms of the lease.

For start ups, a high personal credit score is a vital requirement along with good personal financials and a bank rating of 4 or above. As a start up they have nothing but a concept so the underwriters must rely on the clients personal financial strength. If the borrower is weak in certain areas additional guarantors can be added to build the file strength. 

This is where I get into my rant that anyone looking to start or even already owns a business, they should build themselves up for success by getting their personal and business credit enhanced which will allow them to handle any bump in the road. But fixing or enhancing the credit report is only one step in the process, bank ratings, financials, and other segments are as important and should be part of the package.

Leasing allows the business to save its cash, it also allows them to get the equipment they need at no or little money out of their pocket. Leasing also allows the business the option to buy the equipment at the end of the lease for $1 or they can return the equipment for a new piece of equipment and of course a new lease. Easily being able to exchange equipment is important to many types of business to keep up with technology, codes and other factors.

Lease Structures

Operating Lease

From Investopedia – An operating lease is a contract that allows for the use of an asset but does not convey ownership rights of the asset. Operating leases are considered a form of off-balance-sheet financing—meaning a leased asset and associated liabilities (i.e. future rent payments) are not included on a company’s balance sheet.

Capital Lease

From Investopedia – A capital lease is a contract entitling a renter to the temporary use of an asset, and such a lease has the economic characteristics of asset ownership for accounting purposes. The capital lease requires a renter to book assets and liabilities associated with the lease if the rental contract meets specific requirements. In essence, a capital lease is considered a purchase of an asset, while an operating lease is handled as a true lease under generally accepted accounting principles (GAAP).

Equipment Refinance Equipment Finance Agreement (EFA) or Equipment Loan Program

A method of equipment financing where the business owner can refinance the existing equipment either to lower payments or to get access to cash is called EFA or Equipment Finance Agreement. The program includes fixed payments for a predetermined number of months, where the borrower owns the equipment and the lender merely retains a security interest through the transaction. Both the depreciated value of the equipment and the interest on finance payments are tax deductible to the borrower. The equipment finance agreement is an equipment loan.

“End of Lease” Options

$1.00 BUY OUT

Depending on the needs of the business this might be the perfect option, and is the closest option to straight financing. If the business is looking for long term use of the equipment, the lessee would complete all normal payments and on the last payment include an extra $1 to become owner of the equipment

The equipment, for accounting purposes, is shown as an asset and depreciated. This is a very common option for many businesses, but it is important to remember that typically the payments can be slightly higher.


If staying up with technology, or the equipment will get heavy use the Operating Lease is the best option for that business. With this program, at the end of the lease term the business can opt to return the equipment or purchase it for current market value. This allows the business to replace the equipment with the newest models under a new lease. With this option payments can be written off for accounting purposes.


This option is a hybrid of the capital and operating leases, this option can be 10%, 15%, or 20%. The lessee has the option to pay a predetermined percent of the original equipment cost at the end of the lease, or walk away. By leaving a residual at the end of the lease, the monthly payments are lowered. Tax benefits can also be taken advantage of.

New Accounting Rules for Leases

The Financial Accounting Standards Board (FASB) issued new accounting rules in 2016 for leases – both capital and operating. The new rules require that all leases of more than 12 months must be shown on the business balance sheet as both assets and liabilities. That’s why operating leases of less than a year are treated as an expense, while longer-term operating leases are treated like buying an asset.4

Capital Leases and Depreciation

Because they are considered assets, capital leases may be eligible for depreciation. If you want to lease but want the benefit of depreciating the asset, check with your tax professional before you agree to a capital lease, to be sure it meets the criteria to be depreciable. Some capital leases may not be eligible for accelerated depreciation (bonus depreciation or Section 179 deductions).

Underwriting Factors 

  1. Your credit score
  2. Business history
  3. Type and size of lease
  4. Length of the lease
  5. How well equipment holds value

FAST TRACK LEASE Application only program up to $150,000

  • No Financial Disclosure
  • 24hr Credit Approval
  • Completed Signed Lease Application required
  • Application-only $250,000 for heavy collateral (Comparable Credit Req.)

FLEXIBLE LEASE Financing on new or used equipment.

This covers soft costs such as installation, freight, and taxes. Also includes specially structured lease plans to accommodate our customers cash flow needs.

  • Lease plans for Start-Up companies
  • FMV, 10% Purchase Option, $1 B/Out Option
  • Trac-Lease for Commercial Vehicles
  • Deferred payment plans
  • Seasonal, Step & Skip payment plans

Equipment Leasing Required Documents

Note: The required documentation may vary due to the amount and circumstances of the transactions.

  • Commercial Application – Please complete all information requested
  • Pics of the equipment from all angles along with Identification plate
  • Copy of equipment quote or estimates & desired repayment terms
  • Outline of anticipated purchases for the next twelve (12) months
  • Purpose of Lease or benefit of the equipment
  • Interim Financial Statement (if it has been ninety (90) days since the last financial statements or tax returns)
  • Corporate Financial Statements or Corporate Tax Returns, for the last 3 years
  • Personal Financial Statement of Principal(s)
  • Personal Tax Returns of Principal(s), for the last 3 years

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