So you’re ready to buy your first embroidery machine, but, you’re a little unsure of the best way to pay for it. In this article, we will explain the benefits of purchasing your machine (or future machines) with a lease as opposed to buying outright or using your personal line of credit.
In the embroidery industry, it is very common for shop owners to lease their equipment, and the biggest benefit of doing this simply comes down to the tax savings. Leasing your equipment allows you to write off 100% of the lease payment plus interest in the first year via the Section 179 tax deduction without tying up your working capital. How does this help you? The benefit of utilizing Section 179 is that you get to deduct the cost of eligible equipment immediately. By contrast, most business-related equipment requires depreciation over the course of its useful life. For instance, say you buy an embroidery machine for $40,000 that would typically require straight-line depreciation over seven years. Without Section 179, you’d only be allowed to deduct $5,700 each year over the seven-year period. With Section 179, you get the full $40,000 deduction up front, giving you more immediate tax savings.
Keep Your Capital
Let’s say you’ve saved a substantial amount of money to either start your business or add on to your existing business. The general way of thinking is “If I pay cash for my equipment, I won’t be going into debt and I can be payment free.” While there is nothing wrong with this theory, if you’re starting a new business you also have to think of all the expenses you will have in addition to just purchasing your embroidery equipment. If you are starting a new business, you should be prepared to not “make” any money within the first 3 months. However, during this time you will still need to pay for things like supplies, blank garments, rent, utilities, wages, etc. Having the ability to use your stashed capital to pay for these things while you are getting started is very important to the overall success of your business.
Keep Your Options Open
Oftentimes, people that are trying to start or add to a business are tempted to use their personal line of credit to purchase new equipment. It’s very tempting to do this when most personal lines of credit charge around 4-6% interest which is (most of the time) lower than the interest rate of an equipment lease. The main problem with doing this is you are essentially tying up an alternative option for more capital when you need it. Let’s say you land a new client that needs 5,000 pieces embroidered, unless you require your customers to pre-pay for their order (which is rarely the case) you will need to have available funds to purchase supplies and blanks to fill this order. That would be a much better use of your personal line of credit than using it to purchase new equipment. The second problem with going this route is that a “personal” line of credit is guaranteed by you, if things should happen to go sideways in your business, you are personally the one on the hook for the debt instead of your business.
What If I Have Bad Credit?
If you have less than stellar credit, it may not affect your eligibility to secure an equipment lease. If you have been in business for more than 2 years, and have established some good business credit, some leasing companies may not even have to pull your personal credit at all and can give you an approval based on your business credit alone. If the leasing company your working with does require you to use your personal credit, you can still get an approval with as low as a 600 credit score or sometimes less depending on a few factors.
Leasing Companies We Recommend
At this point, you’re probably wondering which leasing company you should apply with. We have worked with a lot of different leasing companies throughout the years, and there are certainly a few that we recommend to our customers that stand above the rest. The one thing you should be looking for in a lease is to make sure that at the end of the lease, you actually own the equipment. Sometimes leasing companies structure their leases in a way that still requires you to make a significant “buyout” payment at the end of the lease term. The companies we recommend below offer a program called a “$1 buyout lease”, which enables you to “purchase” the equipment for $1 at the end of the lease term. This ensures that you do own your equipment free and clear once the lease is paid out.
1. Geneva Capital
2. Ascentium Capital
3. Marlin Equipment Financing