What Is A Lease Line Of Credit?

We usually think about saving for future expenses. But businesses that expect to replace equipment in the near future can plan for those costs in another way: by seeking a lease line of credit.

What Is A Line Of Credit?

Before getting into exactly how it applies to leasing, let’s take a quick look at what a line of credit is more generally.

If you have a credit card, you’ve already used a revolving line of credit. You can make multiple purchases with the card as long as they stay within your credit limit. As you pay off those purchases, you free up credit to use later.

Credit cards aren’t the only type of line of credit, however. Many banks offer personal and business lines of credit. These tend to have lower interest rates than credit cards do, but are often more difficult to obtain. They may also have annual or access fees associated with them, which make them slightly less convenient for quick, unplanned purchases.

The big advantage offered by lines of credit is that the funds are available when you need them. Installment credit (loans, leases, etc.), on the other hand, usually must be applied for as you need it, which can be limiting if multiple expenses come up at once.

For businesses that want to have a financial cushion, a line of credit can offer peace of mind. Terms and costs can vary, and rates may be fixed or variable depending on the structure.

What Is A Lease Line Of Credit?

Normally, when you lease equipment, you’re selecting an item and getting a price from a vendor. You bring that quote to your lessor, who will then finance the cost of the equipment plus incidental soft costs like shipping.

In most cases, that’s where the process ends. Then, at the end of your leasing term, you may pay the residual, renew the lease, or return the equipment. While you can choose from several lease agreements to tailor the exact terms of your contract, you can’t easily add new equipment.

A lease line of credit — also known as an equipment line of credit — addresses that issue. Rather than financing a specific piece of equipment, the lender will grant you a line of credit with a limited draw period (often 6 to 12 months). Similar to a personal or business line of credit, you’ll be given a credit cap. For the life of the lease line of credit, you can initiate multiple equipment leases (typically through the same lessor or approved vendors).

Questions To Ask Your Financier About Lease Lines Of Credit

Before you sign the paperwork for your lease line of credit, make sure you understand the costs and limitations. Questions to ask include:

• Can I choose different types of leases for different equipment? You may want a conditional sales agreement for an asset you want to keep and an operating lease for an item you anticipate returning.
• Are there access fees when I begin a lease? As with other types of lines of credit, fees can add up. Make sure you know what your costs will be.
• Can I extend my line of credit without reapplying? If you’re using your line of credit as a kind of insurance policy for your equipment needs, you’ll want to know how much flexibility you have.
• What types of equipment are covered? Lessors tend to have general restrictions on the types of equipment they’re willing to finance, but you’ll also want to find out if additional restrictions apply to their lines of credit.

Final Thoughts On Lease Lines Of Credit

Not every lessor offers lines of credit, but if you anticipate having to lease a wide range of equipment within a fixed period of time, it may be worth seeking out a provider who does.

If you want other options for purchasing equipment, get started by checking out our top picks for best equipment financing for small business.