Leasing, A Business Financing Alternative

By Wade Henderson

Business financing, especially for small and medium businesses, is a key part of the activities of financial institutions (nearly 70% of loans to enterprises).

Business financing is what most medium and small entrepreneurs are concerned about. The reason for this is the fact that these types of businesses are important in the new world of globalized commerce. Competition is increasing and banks are more reluctant to give the so much needed business financing.

On investment, formulas for business financing vary widely:

The most common route taken by new entrepreneurs is to create a budget for equipment and the first investment and request business financing through commercial loans.

Leasing. It is another form of business financing. The finance company buys the equipment, bills the borrower for using it, with a purchase option at the end of the contract for a fixed sum at the start (residual value). Nothing forces the company to exercise the option. It is enough to pay for leasing the equipment and returning it at the end of the contract.

Leasing is popularly used by companies that have vehicles and equipment because the leaser often provides maintenance.

There are selection criteria. The choice between these different forms is more open than ever. It depends of the industrial goals of the company:

One factor funders will consider is the amount you are requesting and what the impact of the investment. Generally, banks will not give you all of the money you request. It will be up to the owner to finance up to a 30 percent. Leasing companies work differently. They will give you 100% of what you request the first time.

The prices of leasing have dropped due to the changes in the market. The prices are now more competitive because the offer has risen. Leasing companies when linked to banks give affordable prices.

The use of the equipment is the determining factor in choosing the mode of business financing. When the production process is stable, with good visibility on the duration and rate of utilization of equipment, commercial loans are often pertinent. However, once the investment decision is a gamble on the success industrial or commercial, leasing will be preferred. The leader keeps the possibility of separating equipment that has become unnecessary and recalculates a portion of the fixed costs. - 32183

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