What is A Leasing Model-Definition & Meaning

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TEAM STARTUPED 12 Jan 2022 . 2 min read
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    While startups and new businesses may already realize the many benefits of leasing their equipment, including conserving their cash and significant tax benefits, they also need to carefully research their equipment financing needs before signing the dotted line. Driving revenues through the leasing model typically involves three parties – the seller, the buyer ( the lessee) and the financier( the lessor). In exchange for payment, ownership of an item is transferred from the seller to the lessor. The lessee then contracts with the lessor for the use of the item in exchange for a periodic fee. Startups and new businesses should consider the following 10 tips to make sure that they don’t make any costly mistakes.

      1. Understand your business credit and organize your financial information before contacting an equipment lease financing provider.
      1. Don’t assume your bank or the equipment manufacturer’s captive finance company will offer the best terms. The majority of equipment leases are done by equipment lease providers. Always compare rates, lease terms, fees, and options.
      1. Do due diligence on your proposed financing provider. Once you have a shortlist of providers make sure to check them out thoroughly. Go to Google and run a search on them. Also, run a search on social media sites like Twitter and likes. Work only with established financial solution providers.
      1. Don’t pay upfront “application” fees to an equipment financing provider.
      1. Be prepared to explain in advance any negative business results to a lease financing provider. For example, if you had a business loss in 2015, explain why.
      1. Do the math and determine whether the deduction and bonus depreciation will benefit your business or not. The law allows businesses to deduct the cost of qualifying business equipment placed in service.
      1. Understand the difference between a Fair Market Value Lease and a Purchase Option Lease. A Fair Market Value (FMV) Lease is one of the most common leases that businesses select because it offers the lowest monthly payments, provides the greatest flexibility at the end of the lease, and may also provide tax incentives. An FMV lease is often used for acquiring technology equipment. On the other hand, a Purchase Option Lease gives businesses the ability to “purchase” equipment at the end of a leasing period. The monthly payments are higher than an FMV lease. In addition, you may also have additional financial benefits including depreciation and interest expense benefits for tax purposes.
      1. How the equipment acquisition will benefit your business, describe to the equipment lease financing provider. Provide a projection of cost savings or incremental realizable margins.
      1. Consider bundling multiple equipment acquisitions from different vendors under one lease with independent commercial equipment. Rates tend to be higher for smaller transactions. Bundling equipment acquisitions generally results in lower rates and also minimizes processing fees.
      1. Ask your equipment vendor for payment terms so you can defer a portion of the equipment cost, and coordinate deposits, progress payments, and performance retention payments.
    Follow these tips to conserve and better use your assets.

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