What to Know Before Applying for an Equipment Lease

This article was written exclusively for ForConstructionPros by small business loan provider Balboa Capital.

Construction businesses considering leasing equipment should first ask the question, which type of lease is best for you? Additionally, what are some of the things you need to know prior to applying for an equipment lease?

Before investing in new equipment for your company, you need to do your research to find out what type(s) of equipment will benefit you most and how much it will cost. You need to determine your company’s equipment needs, know the types of leases that are available, understand how leasing affects your financials, check your credit score and examine the tax benefits. Many construction company owners also compare the advantages of a lease over a bank loan. The following are some tips on how to successfully prepare and apply for an equipment lease.

Determine your equipment needs

The first step is to figure out exactly what your construction equipment needs are. Determine what you are trying to achieve for your company and what type of equipment you will need to do it. Look at your current and upcoming construction projects to see if it makes sense from a business and financial perspective to invest in new or updated equipment. Estimate how much the equipment will be used and how long its expected lifecycle will be.

Pick the right equipment lease program

If you want to finance your new construction equipment, you need to know the types of equipment leases that are available. The two most common types are the Fair Market Value (FMV) lease and the Dollar Buyout lease. The FMV lease allows you to either return the equipment at the end of the agreement, or purchase it for its current market value. The Dollar Buyout lease allows you to purchase the leased equipment for $1 at the end of the agreement but will likely have different rates than the FMV. Other types of programs include the Wrap lease, Refinance Program and Sale Leaseback.

Give your business credit a check-up

When you apply for an equipment lease, you will go through a credit check. It’s a standard procedure and helps banks and independent finance companies determine if you are a viable candidate for financing. Many equipment leasing companies do not require owners to put collateral down, so having a solid credit score is very important. If you have any inaccuracies on your credit report, you should have them corrected to maximize your credit score and increase your chances of getting your lease approved.

Examine the tax benefits

Leasing can positively impact your construction company’s financials and taxes. Some benefits include lowering operating expenses, reducing (or eliminating) liabilities on your company’s balance sheet and not accounting for depreciation on the equipment. Another benefit is the Section 179 Tax Deduction. This special IRS provision allows business owners to deduct up to $500,000 worth of qualifying equipment that is purchased and put into use before December 31, 2013. The Section 179 deduction also has a generous 50 percent bonus depreciation.

Latest Changes in Tax Law Makes Planning Even More Critical