The last four years have been tough on the tree care industry, but as consumers and businesses begin to return to spending, it’s a good time for tree services companies to take stock of their equipment needs and financing options to make sure they are primed for the return of discretionary expenditures. With limited budgets during the Great Recession, many tree services companies have delayed capital expenditures for high ticket items including wood chippers, stump grinders, ground units, aerial chip dumps, and telescoping tree trimmers. However, with a pretty consistent flow of positive economic news for both consumers and business, we see this changing in 2012.
If you are also considering acquiring new equipment, and want to conserve available cash, leasing may be an appropriate solution. However, before finalizing the purchase or lease of needed tree services equipment, I recommend that companies carefully consider the following 12 tips so they don’t make any costly mistakes.
- Understand your business credit and organize your financial information before contacting an equipment lease financing provider. Make sure you understand your credit score, your business financial picture, and any discrepancies that might be on your personal credit report or Dun & Bradstreet business credit report.
- Do the math and determine whether the Section 179 deduction and bonus depreciation will benefit your business or not. Section 179 allows businesses to deduct the cost of qualifying businesses equipment placed in service in 2012 up to $125,000. In 2013, the deduction will drop significantly to just $25,000 unless Congress acts. Also, get advice from your tax advisor about the acquisition.
- Determine whether equipment purchases should be made in cash, or whether lease financing makes sense to conserve capital. Do a lease-versus-buy analysis.
- 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, and often at better pricing. Always compare rates, lease terms, fees and options.
- Do due diligence on your proposed financing provider. Once you have a short list 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. Work only with established financial solution providers.
- Don’t pay upfront “application” fees to a bank or equipment financing provider.
- Be prepared to explain in advance any negative business results to a lease financing provider. For example, if you had a business loss in 2010 explain why. If you recently won a major contract, explain that too, even if the new business hasn’t yet affected your business results.
- Understand the difference between a Fair Market Value Lease and a $1 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. A FMV lease is often used for acquiring technology equipment. On the other hand, a $1 Purchase Option Lease gives businesses the ability to “purchase” equipment for a $1 at the end of a leasing period. The monthly payments are higher than a FMV lease. In addition, you may have additional financial benefits including depreciation and/or interest expense benefits for tax purposes under either scenario.
- Describe to the equipment lease financing provider how the equipment acquisition will benefit your business. Provide a projection of cost savings or incremental realizable margins if you have one. Obviously there is a reason why you want to acquire new equipment. Make sure your equipment lease financing provider understands exactly what this reason is.
- Consider bundling multiple equipment acquisitions from different vendors under one lease with an independent commercial equipment lessor. Rates tend to be higher for smaller transactions. Bundling equipment acquisitions generally results in lower rates, is simpler to administer and account for, and also minimizes processing fees.
- 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. Most equipment vendors will ask for a downpayment, with the balance due either at delivery or with ten to thirty days after delivery.
- Be careful of earnest money payment requests. An earnest money payment is sometimes required equal to a fixed amount or one month’s rent as a refundable application fee. The earnest money payment can be called an application fee, deposit, due diligence fee, etc. If the lease transaction is approved, the earnest money payment is applied to the first or last rental payment due under the lease. If the lessor declines the lease transaction, the earnest money payment is refunded, but sometimes, if specifically agreed in the lease proposal, a small portion of the earnest payment may be retained as an application or processing fee. Not all lessors require an earnest money payment.