If you are a startup, a direct financing lease can help you get equipment that will get your business up and running.
So what exactly is a direct financing lease? It differs from operating and capital leases in that when your company purchases equipment through an equipment leasing company, the equipment will not be used in your company but it will be leased out to a third party.
This means that your company is not leveraging your capital to buy the assets at the end of the equipment lease period but it will use the money generated by leasing the equipment to another client.
Currently the economy is not stable and this can be a viable option for companies that specialize in providing select services to their customers. Not every business can hold onto large supply hoping that they will get clients they can lease it to. Through a direct financing lease, you can lease-purchase what you need, when you need it, without investing large amounts of money.
You have to give some assurances if you want to enter into such kind of a leasing agreement through an equipment leasing company. Mostly, leasing companies will request you to provide a copy of your credit report. If you have a high credit score, then this is enough proof that you will be able to make monthly lease payments on time.
If you have a damaged credit score, then your lessor might ask you for additional documentation. This is mainly just a way of protecting themselves and minimizing any risks that come with the business so it’s not that they don’t trust you.
Your company will be responsible for the overall purchase price of the equipment via financing. Remember that your lessor can repossess the equipment in the event that you fail to pay for it fully.
Your client has no responsibility to the equipment leasing company but they are responsible for making their payments to you. You should draft an agreement between you and your client and you should be able to use it to generate enough money to make payments to your equipment leasing company and generate a profit for you.
You can negotiate maintenance of the equipment separately with your lessor and you can pass on the benefits to your client. Once ownership of the equipment is transferred to you, then it will be up to you to maintain the equipment as well as upgrade it. Whatever you agreed with your lessor will no longer be valid once you own the equipment.
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Your direct financing lease agreement has a number of benefits but the most outstanding one is that it allows you to accumulate inventory without laying out significant amounts of cash up front.
You can also generate a significant amount of money from your clients to help you finance the equipment you leased to them. You will also get to enjoy tax benefits such as depreciation deduction. If you do it right, everyone who is involved in the lease agreement will benefit immensely.
Direct Financing Lease Providers
You can get a direct financing lease from three types of leasing companies: independent lessors, captive leasing companies and brokers.
An equipment leasing broker acts as a go between you and the equipment leasing company. A broker takes requests from prospective lessees and takes them to financial service companies or banks that are most likely to finance their equipment.
The broker will then negotiate the best payment schedule and interest rate on behalf of the lessees. The main benefit of using brokers is that you can use their leasing knowledge and the equipment leasing company is responsible for paying their broker’s fee.
2. Captive Leasing Company
A captive leasing company is a subsidiary leasing arm of a dealer or manufacturer. Their main aim is to provide leasing to the manufacturer or dealer. Typically, you’ll only encounter the manufacturer when they are handing you the lease.
3. Independent Lessor
These are equipment leasing companies that lease directly to you. They include diversified financial companies, equipment lease specialists and banks.
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