What Is A Lease Line Of Credit?
We often think in terms of insurance for expensive items we already own, but when it comes to anticipated future expenses, we usually only think in terms of savings. Businesses that expect to replace equipment in the near future, however, can prepare for those expenses in another way: by seeking a lease line of credit.
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What is a Line of Credit?
Before getting into exactly what it means in the context of leasing, let’s take a quick look at what a line of credit is more generally.
If you have a credit card, you’ve made use of what’s sometimes called a revolving line of credit. That is, you can make any number of purchases with the card so long as they add up to less than the card’s limit. As you pay off those purchases, you free up credit which you can then use later on.
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 significantly more difficult to obtain. They may also have annual or access fees associated with them, which make them slightly less ideal for spur-of-the-moment 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, making it difficult to use if you have a number of unexpected expenses come up within a relatively short period of time.
For businesses that want to have to have a monetary cushion, a line of credit can offer peace of mind. Just be aware that, unlike those of installment loans, interest rates on lines of credit are often not fixed.
How Does this Apply to Leasing?
Normally, when you lease equipment you’re selecting an item or items 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. For all intents and purposes, that’s usually the end of the story (there are notable exceptions) until the end of your leasing term, when you either pay your residual, re-lease, return, or sell the equipment. While you can choose from any number of lease agreements to tailor the exact terms of your contract, what you generally can’t do is add leases and equipment to your existing lease.
A lease line of credit addresses that issue. Rather than financing a specific piece of equipment, the lender will grant you a line of credit for a limited period of time–a year is common. 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 leases with different companies, for different types of equipment, up to your credit limit.
Questions to Ask Your Financer
Before you sign the paperwork for your lease line of credit, you should try to get a sense of what its limitations and costs are. Questions you may want 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
Not every lessor offers lines of credit, but if you anticipate having to lease a large variety of equipment within a fixed period of time, if may be worth seeking out one that does.