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
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
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
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
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.