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Are you thinking of leasing a credit card terminal/ printer, or credit card processing software? Here's some of what you need to know to save money and protect yourself.

Do not jump to the conclusion that leasing is better then buying just because you do not have to come up with all the money for the purchase price of credit card equipment up front. Do not assume that leasing is a big rip-off either. The decision to lease or buy deserves greater thought then a snap decision and can save you considerable money. Leasing companies will typically require at minimum the first month's lease payment instead of an outright purchase. As example, you could be choosing between paying $695.00 up front for a terminal/software or making a first month's lease payment of $39.95. The lease payments however might last 36 to 48 months resulting in an effective interest rate of greater then 20% per year borrowing cost. Be aware that leases don't have interest rates but "factors". Convert your payment stream obligation to an annual interest rate.

In my opinion, this is a clear financial decision. Try to keep your emotions out of it. Although the effective interest rate is high on the lease remember that the leasing company is taking the risk of the default and you are joining a pool of lessees who are typically higher risk. Remember, most business owners will lease when money is tight and this increases the risk of default to the leasing companies. That said, here are some things to think about in the decision making process.

Try to purchase the equipment or software outright if you have readily available funds or if you have plenty of credit available - you can even use credit on a credit card if necessary. The effective percentage rate of the lease usually exceeds twenty percent annual interest. This is expensive. If you have the money, or even can borrow the money, then buying up front could also give you the power of possibly negotiating the purchase price of the equipment or software.

However, if money is tight, or your ability to borrow the sum necessary to purchase the equipment or software outright is limited, then leasing may make the most sense. Using the above example, and again assuming money is tight, by purchasing you are tying up $695.00 which could be used to invest in your business.

Investing an extra $695.00 made available by leasing your credit card equipment or software rather then purchasing can return far greater than a 20% annual return. For example, let's say you invest $695.00 in a better website than you could afford without the $695.00 and this results in getting an extra $210.00 PER YEAR in profit. Well, you are making the right decision because the $210.00 per year is giving you a better than 30% annual return on your investment - which is greater then the 20% annual cost of the lease.

The decision to borrow money at 20% annual interest and re-invest it at 30% annual interest makes sense all day long don't you think? Run your own numbers on your business. Be very conservative on the annual return you will get from what you choose to spend the $695.00 on. I think you will find that if money is tight it is very easy to find an investment for your $695.00 that more then offsets the annual interest expense of leasing.

In addition, if you are leasing equipment or software to provide your business with the ability to accept credit and debit cards then the decision becomes fairly easy either way. Run the numbers on an up front investment of $695.00 OR a lease. Factor in the additional profit from just a few extra sales each month that you would not have unless you accepted credit cards. Be very conservative in your estimates. Subtract your monthly investment to accept credit cards from the extra profit. In most cases the net profit after accounting for the upfront investment and the ongoing monthly investment even with a lease payment clearly provides a greater return on investment whether you purchase OR lease.

There are two other advantages to leasing to be aware of and that may factor in your decision-making process. Your accountant will probably tell you that the lease payment is 100% deductible for the full amount of the payments you made that year which will lower your tax liability. On the other hand, when you purchase outright you may not be able to deduct the entire amount of the purchase that year. This is true because even though you paid for the equipment or software up front the investment may be "depreciated" over some years.

Even though the lease is a financing tool you may not have to list the lease as a liability for your remaining payments. This is an advantage to check on with your accountant but if you purchase the equipment or software outright with a credit card, the liability for the remaining balance due will show up on your financial statement as a liability. If you lease then your income statement will simply have a lease payment expense with not necessarily a liability on your balance sheet. Leasing typically will not use up your available credit lines. Banks; however, will sometimes ask about lease liability also.

Conclusion on Leasing

Purchase your terminal/printer or software outright if you can possibly afford it. You are usually better off to negotiate price and pay for the terminal with a credit card if you have to - than entering into a long term lease. Try to negotiate the price. A great technique is to negotiate with your salesperson for a very short financing period. $695.00 divided over four months is $173.75 per month. $39.95 over 48 months is $1,917.60. You get the idea. If you still need to lease than know the answers to the below questions before you decide on the best leasing source.

1. What is my lease payment? Try to negotiate a lower payment. Even a $5.00 per month difference can add up over 48 months.

2. How many months do I have payments? A terminal lease may be $39.95 per month for 48 months as example. Try to negotiate a lower term - like 36 months. Ask the salesperson to calculate their funding on a 48 month lease versus a 36 month lease. The salesperson may be surprised to learn that the funding to them is nearly the same - so they won't care too much about lowering the term.

3. What do I have to pay in addition to the lease payment such as monthly sales tax or "Loss and Destruction Insurance"? Sales tax is usually added depending on your state. Avoid "Loss and Destruction Insurance" if at all possible by having your insurance agent provide a "rider" for the equipment leasing company making them the loss beneficiary of the terminal. If you don't do this right away, remember to do it when you get business insurance that can provide a "rider".

4. Is the lease cancelable? Leasing companies have been in the game for a long time and don't like to cancel leases. Your best bet is to possibly find someone to take your terminal for the remainder of the payments. If your salesperson is paid solely in upfront commissions they usually won't help you.

5. Are there penalties to cancel? The leasing company wants the lease to continue through the term.

6. What happens if I default on the payments? The leasing company WILL go after you.

7. What happens at the end of the lease? Usually the lease is not "lease to own" but will require you to pay the "fair market value" at the end of the lease. If your lease is 48 months as example this fair market buyout would typically be 10% of the aggregate of the payments over the 48 months. (48 times $39.95) times 10%) = $159.60.

8. What happens if I want to pay the lease off early? Again, the leasing company will charge you the "aggregate" of the remaining payments plus typically "fair market value".

9. What happens if I want to sell my terminal/ printer or software for any reason including selling my business? There is not much of an after market for the resale of terminals. In the event of a sale of your business, the new business owner can pick up the lease payments with the permission of the leasing company - but you remain on as guarantor in case of default.

10. What are the hidden fees to look out for? Sales tax, loss and destruction insurance, and the payoff at the end of the lease of "Fair Market Value"

11. What is the difference between leasing and renting? Renting can be a good option depending on your cancellation rights. Be careful about long term rental agreements.

12. Can I rent a terminal/printer or software? Yes, but they are harder to find.

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