Leases and loans are two popular financing options when buying used equipment. Find out which is best for your fitness center.
We have been inundated with financial news speculating if the U.S. economy will or will not slide into a recession. Business owners have a responsibility to plan their respective strategies to lower operating expenses without adversely affecting sales volume so they can operate profitably in challenging financial times. In the fitness industry, one of the largest expenses is direct costs associated with the purchase of strength and cardio equipment.
One strategy is to lower initial capital expenditures by purchasing remanufactured or refurbished equipment. Not only will the total debt resulting from the equipment purchase be reduced, thus reducing the notes payable, but interest expenses will be lowered as a result. When paying cash isn't an option, there are two main options for financing used equipment: leases and loans.
Understanding your optionsIt is important to understand the differences between leasing to finance the purchase of exercise equipment, applying for a business loan or paying for the equipment without using financing.
Lease. A lease is an agreement in which the lessee pays the equipment owner (lessor) to use the equipment for a specific amount of time - like rental payments. When using a lease to finance an equipment purchase, the lessee does not own the equipment when the lease agreement ends. However, upgrades and add-ons for equipment can be built into the lease agreement. Down payments average from 0 to 10 percent. If they are part of the lease agreement, soft costs are paid over time as part of the lease payment. A lease does not affect a company's credit unless the lessee terminates the lease agreement early. In that case, the fitness center is then required to pay everything that would be owed for the full term of the lease agreement. Non-tax leases can take advantage of IRC 179, accelerated depreciation. Tax leases have deductible lease payments. Consult a tax advisor on the specific impact to your business.
Loan. Loans allow the borrower to purchase the equipment and repay the cost over a set period of time, with interest. Loans may require higher down payments, with an average of 10 to 20 percent down. Upfront payments may be significant, including sales tax (which can reach 9 percent in some states). Also, banks may not finance soft costs. Customers can write off the interest portion of the loan; the principle is depreciated according to IRS depreciation schedules. And, the equipment, once paid off, is owned outright by the fitness center.
Cash. Few facilities have the cash reserves to pay for used equipment up front, but, if it's feasible, there are obvious benefits to paying cash for used equipment - such as no debt and no interest paid. However, accounting standards require owned equipment to appear as an asset, with corresponding liability on the balance sheet - meaning owners must be sure to manage asset liability on the books.
Financing new vs. usedFinancing used equipment is often no different than financing new equipment, as most companies will finance remanufactured or refurbished equipment. Used equipment manufacturers don't usually handle financing, and will typically direct customers to various financing sources.
It is sometimes easier to get financing for used equipment compared to new, because the total transaction amount is smaller than with new equipment. The savings can range from 30 up to 70 percent for used equipment. However, newer models command a higher price than older models, even with used equipment.
Another benefit to purchasing used equipment is that the buyer doesn't have to worry as much about depreciation. Used cardio equipment is typically viable for three to five years after purchase. Strength equipment can last from five to up to 10 years.
If you decide to lease remanufactured equipment, you will need to provide the following information to the leasing company:
- Business bank information, including branch, phone number and account number
- Trade reference, including company, phone number and contact name
- Social Security number for each business owner
- Equipment information
- Requested lease amount
- Credit Bureau Report for each personal guarantor
The end of the roadEvery financing agreement must come to an end, and this is where your choices may have the most impact. If you lease used equipment, three options exist: You can purchase the equipment at an additional cost, return the equipment or renew the lease with a possible equipment upgrade. At the end of a loan, you own the equipment outright, at no additional cost.
In general, leasing equipment costs less than buying or borrowing, because you are essentially renting the equipment. Loans may require more upfront costs, but, so long as payments are made in a timely fashion, the fitness center owns the equipment. It's up to you to decide which option is best for your facility.