Equipment Lease Vs. Lease Line of Credit
If you need equipment financing for your business, it’s easy to be overwhelmed by the sheer number of options available to you. You’ll have a choice between a number of different lease types that can be tailored to your needs based on term lengths, ownership preferences, and buyout options. Businesses seeking even more flexibility can combine the coverage of a lease with the security of a line of credit. This is called…wait for it…a lease line of credit.
But does it make sense for your business to go that route?
Leases come in a wide variety of flavors, but most have the following in common:
- Term lengths: The amount of time you’ll be making installed, monthly payments
- Regular payment schedules: Typically you’ll be paying monthly, but some leases allow for seasonal deferments or less frequent payments (quarterly, for example).
- Residuals: The amount left over at the end of the lease for which you, the lessee, will be on the hook. This amount can be as small as $1 with some conditional sales agreements. Operating leases, on the other hand, will tend to have higher residuals should you choose to purchase rather than return your equipment.
In practice, a finance lease for a $12,000 asset might look something like this:
|Term length:||24 months|
|Down payment:||First and last month’s payment|
|Cost to purchase (residual):||$1,200 (10% Buyout)|
|Total cost of equipment:||$14,520|
Note that this is a very broad characterization of a lease. Depending on the terms you work out with your lessor, you may be able to negotiate residuals, set optional buyout windows, or return the equipment to the lessor at the end of your contract.
One of the major advantages of leases is that they tend to be quick; you can usually finance a piece of equipment within a few days if you need to. Keep that in mind when you consider whether a lease line of credit is appropriate.
Lease Line of Credit
Here’s where I admit that the whole “versus” construction of this article is a bit misleading with regard lease line of credits. In fact, it’s best to think of the line of credit aspect as an optional addendum to your leasing activities, a tool to make your leasing needs (potentially) more convenient.
A lease line of credit assumes that you will be leasing different types of equipment from different vendors within a short period of time–a year for example. If your application is accepted, the lessor will approve you for a certain amount of money: your credit limit. For the life of your line of credit, you can initiate as many leases as you want up to the credit limit. You’re effectively bundling a number of leases into one single package with your lessor.
An additional benefit of this type of product is that it gives you some freedom in negotiating prices with vendors since you’re pre-approved for financing.
So why wouldn’t you automatically choose a lease line of credit over a simple lease? Here are a few reasons:
- You might only need a single lease.
- Not every lessor offers them. If you have a good lessor who is willing to work with you, it may not be worth seeking out a lease line of credit
- They can affect your credit. In some cases, having an open line of credit can make it harder to get additional credit if you need it.
- There may be restrictions on lease types. Many lessors will allow you to enter any type of lease that they would normally finance, but you’ll want to be clear on any constraints.
- Potential extra fees.
Note that the types of fees charged–if they’re charged at all–may vary greatly from financer to financer. These fees might include a setup fee, a fee for usage, a fee for non-usage, renewal fees, restocking fees and closing fees. Be sure to ask your prospective financer what fees they charge, if any.
A lease line of credit can provide additional flexibility and convenience for companies with complex equipment needs, but you’ll want to be sure you read all the fine print in advance. To get a sense of what companies offer lease lines of credit, check out our equipment financing reviews.