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Almost everyone who buys a franchise needs more money. The options for getting more money are limited, and they usually boil down to borrowing the money. Some borrowers get bank loans, others convert their retirement funds, some use credit cards and others borrow from family and friends. But there’s still another option that isn’t immediately apparent: leasing.
If you’re investing in a franchise that includes equipment, such as a POS system, or fryers and ovens for the kitchen, or if you need a vehicle, such as a van or panel truck, you may be better off leasing than taking out a loan. Leasing equipment is the equivalent of “renting” the equipment, which means that you won’t take money from your working capital to buy the equipment. With a lease, you set up a monthly payment, and at the end of the lease you can acquire the equipment, or upgrade it and roll the package into another lease.
Here are eight reasons why you should consider a lease when you start a franchise:
- Preserve your working capital. It’s important to keep cash on hand instead of using it to buy items that could be leased. You may want to get a business loan when you start your franchise, but it may not be enough to cover your needs. Before you decide to reduce your working capital and purchase the equipment, consider a lease.
- Claim a tax benefit. Section 179 of the U.S. Internal Revenue Service Code allows you to write off a percentage of a monthly lease payment. The law frequently changes, so it’s important to consult with a tax advisor before claiming this benefit. You may not get a similar tax benefit with a loan, and you surely won’t get it by taking money out of your pocket.
- FICO requirements are usually lower for leasing. Since there’s less risk with a lease – equipment, after all, can be confiscated – your credit rating requirements may be less than what’s required for a loan.
- There are no prepayment penalties. If you’re franchise evolves faster than you expected and you want to pay off your lease and buy the equipment, you can do so without having to pay a penalty.
- You can choose the terms: 24 to 60 months. Leasing provides flexibility in terms of payback time, and that will help you keep the payment amount in line with your cash flow.
- If you’re “corporate worthy” (you’ve been in business at least five years) you may not have to sign a personal guarantee. Hey, take any advantage you can get when it comes to reducing your personal liabilities.
- If you own an existing business and you’re opening a second unit of that business, you may be able to use the first business to guarantee the lease, and you won’t have to sign a personal guarantee. Now that’s another reason why it makes sense to be in franchising!
- Closing costs are minimal: almost always less than $500. Once again, a lease saves you money.
There are few disadvantages to a lease, although no one will argue that if you’ve got the money, and can afford to spend it, then it’s less expensive to buy products outright and save the interest. Few franchisees, especially those just getting into business, are in that economic situation, however.
Of course, you still need to provide personal financial information and provide a variety of documents to the lender, but this is all the easier when you’re buying a franchise. In fact, many franchisors have pre-arranged relationships with leasing companies and they will be able to introduce you to the lenders.
One more advantage: Securing a lease may be faster than securing a loan – especially if you’re leasing an equipment package, software, a POS system, or a vehicle that’s recommended by a franchisor that’s well known to the lender.