The most common financing option available for franchises using equipment leasing is a capital lease. The main purpose of a capital lease is to finance the equipment purchase while preserving the owner’s working capital. Franchisees can finance the purchase of their proprietary equipment, security systems, computer hardware & software, flooring, outdoor signage and other tangible items needed to run the business using an equipment lease. The owner(s) are required to personally guarantee equipment lease.
The following are 4 key benefits to your business of leasing equipment:
- Conserve and Control Cash. Equipment leasing saves your working capital for day-to-day business expenses, business expansions, or unexpected business-related expenses. In addition to saving your working capital, a lease provides a pre-determined monthly line item, which can help you budget more effectively. With predictable monthly expenses you can develop long-term plans for your business with confidence and get your business set up with the equipment you need, while keeping your cash flow available for other expenditures.
- Upgrade outdated Equipment. Depending on your business type, equipment leasing can help you stay on top of the latest advances in equipment and technology. How long do you plan to keep the asset? If you're only planning to keep it for the short term, you may find that leasing is a better alternative than buying it and trying to resell it when you no longer need it. You can also determine the length of your lease, so if you work with technology that changes rapidly, you can take on a short lease to ensure you’re always at the cutting edge in your industry.
- Tax Benefits. Lease financing presents your business with tax benefits with a full deduction of lease payments against current earnings. It also preserves working capital that you wouldn’t have access to if you had to purchase your equipment up front. It is a good idea to check with your tax advisor to determine the tax benefits of leasing for your business.
- More Attractive Balance Sheet. Monthly lease payments are viewed as a business expense instead of long-term debt. Having little debt on your balance sheet helps you secure financing to fund your business. And who doesn’t love a sexy balance sheet?
The manufacturers of nearly all equipment that is costly will offer equipment leasing. The leases are usually capital leases, so the equipment will be owned by the business at the end of the lease term. The typical lease for a start-up business will require a 20% down payment and repayment term will be 36 months. The typical terms of an equipment lease for an existing company is a down payment that will range from a lease payment up to 20% of the amount financed. Lease documentation fees may range from $95 to $495. Repayment terms typically range from 12 months up to 60 months. All payments made are tax deductible, so the payments will lower business’s taxable income and, in turn, tax liability. Since the plan is to keep their equipment long term, a typical capital lease offers a $1.00 end of term purchase option.
Ultimately, a few simple rules of thumb will help you decide to lease or buy. If your equipment requirements are relatively small and you have the money or can get a low-interest loan, then buy the equipment. If you require a substantial amount of equipment, why tie up a large amount of cash especially when you could use that same money to grow your business? In short, an equipment lease is used to finance the purchase of all equipment needed to manage the franchise; thus, preserving the franchisee’s working capital.
Item 20 – a goldmine of information
But prospective franchisees routinely overlook one of the most significant items in the FDD: List of Outlets. It’s important to read that document, and especially to not only read but utilize Item 20.
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