You’re ready to start building your embroidery business and buy your first machine. How do you decide whether or not you should lease or buy a machine outright?
In the embroidery business, a lot of people lease a large portion of their equipment. The reason being is that there are benefits to leasing over buying outright. For starters if you’re working with a leasing company, the lease doesn’t affect your personal line of credit with the bank. Allowing you to take out other loans, if needed, to help start your business. Or later down the road if you need a loan to help you fill a large order, or to assist with your taxes.
Some businesses will consider paying for their equipment with a credit card. Perhaps they have 0% interest for a year. However, once that year is up they’re going to be building up quite a significant amount of interest. Plus, they’re locking up their available funds in revolving credit. It’s often better to save the credit available on the credit card for emergencies – such as ordering blanks for a large order. Plus revolving debt, if not handled properly, can have a negative impact on your credit score, limiting your ability to borrow in the future.
Before starting a business, it’s often recommended to have some funds saved up. Perhaps you are able to save up $20,000 and may consider using some or all of that to purchase a machine. However, when you’re just starting out, you need to be prepared to not make any money for the first 90 days. During that 90 days, you want to be able to pay for supplies, blanks, rent, and your wages. Having that $20,000 provides you with a safety net.
Another thing to consider with that $20,000 you’ve saved up, is if it’s in a bank account that’s earning you interest. Even at a few dollars a month, that money is working for you. Plus, having a savings, makes banks look more favorably on you when you go to ask for a loan.
Ensure you’re working with the right leasing company, and you’ve done your homework. Because there is interest on your lease, often finance companies will let you overreach. Part of your job is to take a look at the finance company to ensure it’s the right fit for your business. But also do your business homework – have a viable business plan and do your market research. Know how much money you need to make each month to sustain a profit (after you’ve paid off all your expenses). Know whether that is viable.
Having a lease allows you to write off 100% of it when you do your taxes. Taxes are one of the biggest business killers. When you work for someone, your taxes are automatically taken off your paycheck. However, when you work for yourself, you need to set aside money, because you will owe the government something at the end of the year. Accountants recommend setting aside 20% of everything you bill to go towards taxes (consult your accountant or CPA for more details). So if you billed your customers $4,000 this month, you should be setting aside $800.
Taxes can be pretty complicated, so we highly recommend talking with an accountant or CPA before you start your business, to ensure you are set up for success, and to understand the difference in writing off your lease as opposed to buying your equipment with a loan. Essentially, when you use a loan to buy the equipment you can write off a depreciating value on the equipment. However with a lease, you can write off the whole amount, and you don’t have to write it off in the first year. Why is that important? Let’s say your first year you don’t make that much profit, and so you’re in a low tax bracket, writing off your equipment may have no benefit to you. But perhaps in your second or third year, you’re making more profit, so writing off the equipment will put you in a lower tax bracket, meaning you owe the government less.
This benefit for leasing doesn’t just apply to new businesses. If later down the road you decide to expand, buy a second embroidery machine or a new one, you can lease again, and use that lease against your taxes.
What kind of credit does a person need to lease?
While this is an important question, it’s not the determining factor on whether or not you can get a lease. A lot of finance companies will work with you to build a lease plan that be comfortable. Some will even work with you if your score is below 600 – but there are a lot of other factors they’ll take into consideration. Even in you get declined for a lease, often time the finance company can give you tips of what you need to do to improve, and can help you work towards improving your credit so that you can get a lease later down the road.
If you’re buying two machines, should you lease them together or separate them?
There are benefits to both. Leasing them together means you’ll be able to get a lower % on the lease. However, when it comes to your taxes, you’re writing them off together, so if you have two separate leases, you could write on-off one year, and the other the next.
For more answers about leasing embroidery equipment for your business, talk to your equipment sales rep.