Introduction to Equipment Financing for Franchisees

by RJ Grimshaw

As a new franchisee, putting together your financing is one of your most important business strategies, especially when you have to purchase equipment. if you pay for your equipment outright, it can be expensive enough to disrupt your cash flow -- even though it may seem like the most cost-effective way to invest in the growth of your business. You must consider things like depreciation, maintenance and repairs before signing that check. Also, the need to upgrade over time could be another drain on your capital. For many franchise owners, resisting the urge to purchase equipment (especially as you are just starting) frees up precious funds that could be used for marketing and developing the growth of your customer base. At the same time, in the U.S., businesses can deduct costs of equipment purchases if the type of equipment qualifies (and deduction amounts vary from year to year). Also, the U.S. and Canada allow you to deduct the cost of depreciation which can take the sting out of some of the expense as your equipment ages and loses value. Consulting your tax attorney on these points would be wise.

Need to buy equipment? Leasing can be a viable alternative, but there are important issues to consider before taking that step.

Equipment leasing has become an increasingly popular option for companies that need new equipment. A lease lets you “pass the buck”—at least for a while. A funding source (the lessor) will purchase the equipment. As the Lessee, you can use the equipment in exchange for regular payments made over a contracted period of time. Just like a bank loan though, you need to have good credit and prove your ability to repay the lender.

If you are considering an acquisition, expansion or construction of a franchised business, the key can be to determine your borrowing needs. Addressing the overall financing requirements will allow you to select the needed financing sources. FF&E financing can be a viable alternative to a cash purchase.

Important variables to keep in mind are:

1. Is my lender really a lender?

• You should expect a yes to this question. In many cases, a source is not a direct lender but a middleman or broker. Your costs could potentially increase using a broker as the commission is typically added to the overall cost.

2. Lender expertise in the industry.

• It is important to find out how much industry experience your lender has. The more experience in the business the better.

3. Lease term.

• Structure the term of the financing with the estimated useful life of the equipment.

4. Process.

• Your lender should explain the process to you upfront including what specific documentation will be required. Understand the timeframe associated with getting your credit approved.

5. Financing limits.

• Any potential limits should be discussed to determine if the financing is available for the total costs involved in the financing.

In addition to the variables above, there are a number of key factors to consider when shopping for equipment financing:

1. It is important to ask if there are any non-refundable fees associated with your credit request that are not applied to the benefit of your lease.

2. Do you have a firm commitment/approval or a proposal? All documentation should be read carefully. Proposals can be carefully disguised to look like a commitment. Don’t send any money until you are sure what you are signing. Remember the large print giveth and the small print taketh away.

3. Be prepared and have your financial information organized and available. An equipment financing source will require this to move forward for approval.

Equipment financing is a product. A seasoned leasing professional will understand the nuances of your industry and have the knowledge to get your requests approved and closed. Don’t hesitate to ask questions and get references. Shopping for and securing financing can be difficult at best. The equipment leasing program you select should take into account the individual needs of the project no matter how ordinary or exceptional they may be. Look for a full-service equipment leasing and financing company that services its leases from origination to termination.

For more information visit: www.teamunifi.com

RJ Grimshaw, President & CEO, UniFi Equipment Finance, has previously served on the ELFA’s (Equipment Leasing and Finance Association) Vendor and Captive Business Council Steering Committee, as well participated in the past two Industry Future Councils with the ELFA foundation. RJ is a lifelong student of business, and passionate about helping entrepreneurs succeed. UniFi Equipment Finance is a wholly-owned subsidiary of the Bank of Ann Arbor. RJ joined Bank of Ann Arbor in August 2013 as an Executive Vice President and Chief Sales Officer. With more than 20 years of experience in the equipment finance/ banking industry, he brings valuable experience in the areas of commercial banking, investment banking, and business banking.