If your bank has turned its back on you, check out equipment leasing and cash flow-based loans.
Your business is poised to expand, but lacks working capital, because nobody told your lenders that the recession is over. Instead of tearing out your hair, why not leverage your equipment (or your anticipated cash flow) to get the money you need?
When you lease equipment, there are no out-of-pocket expenses, and you’ll enjoy tax benefits and 100% financing – financing that often covers shipping, taxes and installation. This lets you devote working capital to other fronts, such as sales and marketing, while generating higher profits with the new equipment.
Because you don’t own the equipment outright, you shift the ownership risks to the lender as the value of the equipment depreciates and/or becomes obsolete. And since lease payments are considered business expenses, they can be set off against revenue when calculating taxes.
Leases come in three types:
- Finance lease. Here, the lease term is usually tied to the useful life of the asset.
- Operating Lease. The lease term is shorter than the equipment’s useful life, so this is best for companies that plan to use the asset for only a short time.
- Sale Lease Back. The company sells its equipment to a financing or leasing company for cash, and leases the equipment back for a fixed monthly payment. This is all done on paper, and it’s a great way to improve cash flow.
As the name implies, banks that offer cash flow-based loans use the borrower’s anticipated cash flows as a form of collateral.
To secure repayment, the lender analyzes the borrower’s financials, including enterprise value, EBITDA (earnings before interest, taxes, depreciation and amortization), total interest coverage ratio and total debt. Then, the loans are usually repaid through automatic deductions from the borrower’s bank account.
Cash flow-based loans are especially attractive to companies with few tangible assets, and are often used to finance growth and acquisitions.
Are these types of loan suited to your business?
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3 Comments on "Equipment Leases and Cash Flow-Based Loans Can Take the Brakes Off Growth"
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