1. $0 Down
How to Get Equipment Financing With $0 Down
For many companies, leasing or buying equipment with $0 down is a dream come true. With $0 down, you don’t have to give up any of your precious capital reserves to pay for equipment, and you can take possession of it immediately. Depending on the type of equipment, this means that you can start generating revenue immediately for your business before you have to pay out any meaningful capital. One of the ways to finance equipment with a $0 down payment is to use a $1 buyout lease, which is very similar to a traditional loan but has some different accounting ramifications.
How Does It Work?
What Are the Rates?
Am I Eligible?
How Much Can I Get?
What Documents Do I Need?
What Are the Terms?
From an operating capital perspective, you can think of a $1 buyout lease like a loan. A typical $1 buyout lease has fixed payments over a specified term. For your final payment, you’ll pay $1 in exchange for ownership of the equipment outright. Unlike with a loan, you can transfer the asset you’re financing to your balance sheet immediately, which could qualify you for depreciation and interest expenses, reducing your effective cost. This can be a priority in the accounting departments of certain companies.
Generally, you’ll want to use a $1 buyout lease on equipment that will hold its value over time. If you are financing equipment that rapidly loses its value, you won’t want to own it at the end of the fixed financing term, even for $1. For example, if you’re financing equipment with a useful life of three years, you won’t want to sign a five-year $1 buyout lease, as the equipment will be technically worthless by the time you buy it. Heavy equipment, for example, will likely continue to generate revenue for long after the time a $1 buyout lease matures, so it’s a good candidate for this type of financing.
No matter what type of equipment financing you seek, your rate will vary based on the lender’s perception of your risk. The more likely you are to make your payments, the more likely you’ll get a decent financing rate. This means that large businesses with years of growing revenue and profits will always be able to obtain better financing than newer companies or individuals with sketchy credit histories. However, financing of some type is almost always available to companies, particularly for collateralized loans — you’ll just have to keep your eye on the rate you’re offered.
For the average $1 buyout lease financing, you can probably find rates in the 7 percent to 10 percent range. The better your personal credit and the stronger your business financials, the more likely you’ll find rates towards the lower end of that range.
Equipment loans can be easier to qualify for than unsecured loans because the value of your equipment acts as collateral for your loan. However, if you’re looking to put $0 down, you’re making the loan a riskier proposition for the lender. imagine if you were to finance a $100,000 piece of equipment with $0 down and then fail to make payments starting three months later. Yes, the lender can repossess the property to help pay off the loan, but it will likely lose money on the deal. Your equipment will now be used and will have depreciated, and with $0 down, all the lender has to show for it is three monthly payments. That’s a losing scenario for any lender.
To help offset that risk, you might need better credit or a more robust business to qualify for $0 down financing or a $1 buyout lease. If you have a proven track record of paying back your loans in a timely fashion, that will go a long way. So will years of consistent revenue and/or profit in your business — but this isn’t always an option for newer or startup businesses.
The bottom line is you’re more likely to be approved for $0 down financing if you’ve been operating for a number of years. Startups might have better luck choosing a different form of financing.
The size of your $0 down loan will be commensurate with the value of the asset you’re financing. Since a $1 buyout lease is essentially the same as a purchase loan, in terms of the payments you’ll make, you should expect to pay the full value of the equipment over the life of the loan, plus interest. Of course, all loans are contingent to at least some degree on your credit profile and the cash flow and operating history of your business. Since your $1 buyout lease will be collateralized by your equipment, however, you can often get 100 percent financing.
Documentation requirements for all types of equipment loans are fairly standard. Since your new equipment is going to act as collateral for the loan, you generally won’t need as much documentation or proof of payback capability as with a general unsecured loan. However, finance is still finance, and the more evidence you can show that proves your ability to make the lender whole, the more likely you are to get approved, and at a better rate.
At the very least, you should expect to provide this type of basic documentation:
- Information about the equipment, such as an invoice or purchase agreement
- Personal identifying and financial information, such as your Social Security number
- Business bank statements, from a few months to few years depending on the lender
In some cases, you might be asked for additional information, such as an operator’s license, business permits or proof of insurance.
The bottom line is that you should be willing to provide any evidence that shows you’re a good credit risk and that the lender is likely to get paid in whole and on time.
Terms for a $1 buyout lease are much like a traditional loan. This means that your terms can likely be fairly flexible, depending on your credit qualifications and your choice of lender. The type of equipment you’re financing will also play a role in determining your terms. For example, you might be able to finance heavy equipment with a 20-year life for a longer term than you would for shorter-term equipment. Of course, the longer the term length you choose, the more interest you will pay over the life of the lease/loan. Since all of these factors are highly variable, rates can range from about 6 percent to 15 percent or more for a $1 buyout lease.