Lease Financing Can Take the Sting Out of Bank Loans

Is it time to upgrade the equipment in your carwash or proceed with the expansion you’ve been planning? In addition to deciding on the best equipment for your business, you also need to find the best way to pay for it.

For some businesses, the easiest way to do this is simply to write a check. This can be an effective use of capital if there is a surplus of cash in your operating account. Many businesses, however, want to keep working capital in their accounts for future business expansion or to hedge against an economic downturn. For those companies it doesn’t make sense to utilize their available cash to purchase equipment, when it can be better used for operational expenses, such as personnel, overhead, supplies and advertising.

To get the equipment they need, they will have to find a way to finance it.

The credit market has changed dramatically over the past few months. No longer are banks aggressively seeking new loan opportunities. In fact, just the opposite is true. At the beginning of the second quarter of this year, Federal Reserve Chairman Ben Bernanke told banks to continue raising capital to replace losses incurred in this year’s credit crisis. He further urged banks to be conservative in making new loans. This means most banks are actively seeking deposits, but they are not aggressively seeking new lending opportunities.

Small businesses are feeling the pinch in this tighter credit environment. A year ago, banks often competed to lend money. That’s not the case any more. According to a Federal Reserve poll of bank senior loan officers, banks have been tightening their credit standards at record levels this year. This is expected to continue through the fall. Even the Small Business Administration’s loans have been affected. Volume for the SBA’s most popular small business loan has decreased by 19 percent this year.

Bank lending has not completely dried up, however. If a business is credit-worthy, it can generally obtain financing. However, the process has become more arduous and the approval criteria more stringent. Obtaining a loan today generally requires more paperwork and more money upfront. For a carwash equipment loan, it’s not unusual for a bank to ask for up to 50 percent down. And the bank’s decision-making process can take up to several weeks.

There are financing alternatives to traditional bank loans which have become increasingly attractive in the current lending environment. The most popular of these alternatives is lease financing. There are several lease finance companies that specialize in equipment finance for the carwash industry. Most carwash equipment vendors can recommend a finance company to their customers who are seeking financing options for their equipment acquisition.

Lease financing for carwash equipment offers several significant benefits. It can provide 100 percent financing and may include costs, such as delivery and installation charges, into the financed amount. This requires very little out-of-pocket expenses from operators.

Most lease companies ask for just the first and last payments in advance, which is usually less than 5 percent of the total acquisition price. This can be a lot easier on your cash position than the down payments generally required for a bank loan.

Depending on the amount of the financing request, lease financing approval can often be obtained with just a simple one-page application. Generally, the paperwork needed to secure financing with a lease will be substantially less than with conventional bank financing. Also, bank loans often require additional collateral, including other equipment owned by the business, personal residences and other real estate owned by the company principals. Leases are generally collateralized by just the equipment financed and the personal guarantee of the principals of the business.

By utilizing lease financing to acquire your carwash equipment you can preserve your existing bank lines of credit for future operating expenses or expansion opportunities.

In addition, with a properly structured lease you may be able to take advantage of accelerated tax deductions associated with the Economic Stimulus Package of 2008. These tax deductions may allow you to deduct up to $250,000 of your equipment purchases from your 2008 taxable income. Be sure to consult with your tax adviser for your specific benefits.

When choosing a lease finance company, it’s important to determine whether they are a direct lender, broker or a division or affiliate of a bank. This can have an impact on how quickly they can make a credit decision and process your financing approval. Many leasing companies, especially direct lenders, can make credit decisions within hours, allowing you to acquire your equipment the same day your lease financing request is approved.

Whether you choose to use a bank loan or lease financing to acquire your new carwash equipment, be sure you understand the terms and conditions of your choice and what it means to your business.

Money is a tool. Put it, as well as your new carwash equipment, to work for your business success.

Linda R. Winn is vice president of sales for Highline Capital Corp. Contact Linda at 877.422.4100, ext. 252, lwinn@highlinecapital.com or visit www.highlinecapital.com.