What You Need to Know About Leasing Tanning Beds
If you are an existing tanning salon owner or a new entrepreneur looking at tanning beds to add to your business, you generally will have 4 options to choose from when funding your purchase.
- Traditional Bank Financing
- SBA Loans
- Paying Cash
Traditional bank financing can sometimes be difficult to obtain and paying cash is great if you can afford to but sometime during your research, you are likely to call a number of salespeople and distributors that highly recommend leasing as the first (or only) option. They may provide you with a list of benefits including tax advantages, fast approvals, maintaining liquidity and higher approval amounts in order to convince you to take the next step and apply.
Although there are advantages to leasing your tanning beds, the real motivation for your salesperson's preference to leasing may not necessarily be in your best financial interest. During the rest of this article, you will uncover the truth about leasing tanning beds and you will know the things your salesperson may leave out of their presentation to you.
What is a tanning bed leasing company?
A leasing company is any company that maintains possession of the property or equipment while establishing a rental agreement with the client for the use of that property or equipment.
Leasing companies come in several forms. Two of which are the most common in the tanning industry:
A broker takes your application and goes out to several funding sources (AKA banks) and tries to obtain a loan amount equal to the purchase price of the equipment. The bank gets their percentage of the transaction as does the broker. By the time the money gets to you, there is a markup on it. In many cases, brokers will negotiate their markup so it never hurts to ask for a better rate.
Brokers will generally have relationships with several funding sources which increases your chance of an approval even if you have less than perfect credit.
Direct Funding Source
A direct funding source is usually a bank that happens to offer leasing. There is no brokering and rates can be more competitive since you will be working directly with the organization in control of the money.
Why salespeople push leasing tanning beds so much.
Money. There are several reasons your salesperson might talk up leasing and it all boils down to their paychecks:
- Referral fees paid to your salesperson.
- They maintain more control over the financing process.
- Approvals are easy to obtain thus increasing their likeliness of a sale.
- You are stuck buying from them.
Often times your salesperson will get paid a referral fee by the leasing company that amounts to a percentage of the total price of the tanning bed. This fee paid by the leasing company to the salesperson is tacked right back onto the lease in the form of an increased APR. You guessed it, you end up paying for it in the end. Not all leasing companies pay a referral fee and not all salespeople accept them, so it can be hard to identify whether or not you are paying a referral fee. Always ask first and be very leery of companies that accept these commissions.
Your salesperson will also maintain more control over the financing process while leasing tanning beds. At anytime they can discuss your credit worthiness with the leasing agent or check on the status of an application. Although the leasing company cannot disclose your personal information by law, they can say things like, "they're strong and can get funded", or "they're not strong and probably won't get funded."
Leasing your tanning equipment can improve your chances of getting funded vs. traditional bank financing which may also increase your salesperson's chance of getting your sale. Obviously, your salesperson wants to make it as easy as possible to buy.
After you get the approval, you're stuck buying their tanning beds! If you submitted an application for leasing though XYZ tanning company which resulted in an approval for $30,000, you cannot take that approval and shop for equipment at other vendors. The leasing company will only allow you to use your approval to lease tanning beds at the company you began the process with. If you found a better tanning bed from another company and wanted to lease it, you will have to go through the application process again which may result in yet another credit inquiry on your report. Good deal for them, maybe a bad deal for you.
Interest rates you can expect when leasing tanning equipment.
Established businesses are considered a lower risk than new businesses. If you have been in business longer then 2 years, chances are good that you fit into the "established business" category. For you, interest rates can be very competitive; 12-17% is typical.
For those that fit into the "new business" or "start up" category, you'll pay out the nose for leasing. You are considered a high risk business and I have seen rates exceed 40%. Regardless of the tax advantages for leasing tanning beds, 40% APR is a jagged pill to swallow.
If you are a new business, anyone who suggests leasing as the first option for financing tanning beds is not looking out for your best financial interest. It is wise to explore other methods of financing first and use leasing when all else fails.
If you lease your tanning beds, you may not be able to trade them in at the end of the term.
Nor would you want to. Most leasing companies make you sign an agreement to buy the beds after your term is up. Those that allow trade ins and trade ups will give you pennies on the dolor for your beds at the very best. Economically, it makes little sense to trade in a $20,000 tanning bed for $2000 of credit towards new equipment after just 3 years.
You may not be able to pay off the lease early or refinance the equipment.
If you decide to get out of the lease by paying it off early or otherwise decide to end your relationship with the leasing company, you may not be able to. Leasing companies make their money on the interest they charge you so they have a vested interest in you completing your lease term. This means that you may find yourself stuck paying their rates throughout the entire term even though you have the ability to buy out early.
The positives of leasing your tanning beds.
Established businesses will benefit the most from leasing tanning beds because of the following:
- Will not show as a liability on a credit report
- No non-related collateral required
- Maintains your liquidity
- Tax write-offs
A tanning bed lease often times will not show as a liability on your credit like a car lease will. If you lease tanning beds and pull your credit 6 months later, there will be no indication that you owe a creditor for those beds. The benefit is that you are able to free up future credit lines by maintaining a low debt to income ratio.
Unlike traditional bank financing, leasing does not generally require non-related collateral such as real estate to do the deal. The tanning equipment itself acts as collateral in a lease.
By leasing, you maintain your liquidity by not having a huge down payment or cash injection due prior to funding. Cash reserves are important and leasing your tanning beds prevents you from having to dip into them.
The entire lease payment can be written off as a business expense in some cases. Factoring in this write-off can exceed the benefit of straight line depreciation often used in traditional bank financing.
Leasing is recommended by many tanning bed salespeople as the first option for funding the purchase of tanning equipment. This recommendation is often done without taking your best financial interest into consideration, especially if you are a new business. Your best option is to look at leasing tanning beds as a last resort after all other options have failed or have proven too difficult. If you have an established business, leasing becomes more beneficial but care should be given to the terms of the lease and the effective APR to ensure you are getting a fair deal.