Building a small business from nothing is an immense challenge, and needing to spend thousands of dollars on necessary equipment doesn’t make it any easier. Fortunately, leaseback financing is available for people like you and can help you get the equipment you need and an immediate source of steady revenue that will keep you in business.
Generally, this technique works if you have heavy machinery or construction vehicles (usually upwards of $1000) that you can offer up as collateral for an almost immediate cash loan. Other than the price point, the other general criteria for determining whether your equipment qualifies is that it must be able to be repossessed, it has to be unique and identifiable with a serial or VIN number, and it helps if there is a good market for the equipment so that the investor can easily sell your equipment, should it come to that. Thus, you can’t engage in leaseback financing with a bunch of small, inexpensive items, but you could potentially offer up real estate.
Advantages
There are other advantages to leaseback financing besides its basic ability to prevent you from going out of business just after buying equipment. Since the loan is based on the equipment alone, you can qualify with bad credit, and the fact that you’re a startup won’t factor into an investor’s decision even though it has a huge impact in more traditional lending settings.
Also, since the loan is essentially a means for you to pay for your equipment, you can write it off as “operating costs” and heavily reduce your business’ taxes.
Since lenders who get involved this way understand that most businesses coming to them are startups and are just trying to increase their customer base and revenue, they normally offer longer terms and lower rates than traditional loan methods.
Disadvantages
Like any loan, there are some potential drawbacks. The obvious one is that you’ll lose your equipment if you default. These loans also tend to work on a 2 to 1 ratio, meaning that if you offer up $100,000 worth of equipment, you might get $50,000. Lastly, investors tend to value the equipment not at the purchasing price but at the price that they expect to get for it from an auction.
These shouldn’t deter you if you’re careful, and the advantages can make the difference between a slow, painful start and a vibrant one. Acquiring all the equipment you need for your business is difficult, but if you turn all of it into an instant revenue stream, your capital will be worth significantly more than you bought it for.