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Authors: Inc The Staff of Entrepreneur Media

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Cost Cutters
 
Technology is far less expensive than it was just three to five years ago. For example, you can purchase a powerful, PC-based desktop computer for under $1,000. Three years ago, a similar machine might have cost $3,000 or more. That being said, equipping your business can still be a costly proposition. Fortunately, there are several different avenues you can take to keep the expenses to a minimum.
Financing Plan
 
If you’re buying expensive equipment, consider having the manufacturers “lend” you money by selling the equipment to you over a period of time.
There are two types of credit contracts commonly used to finance equipment purchases: the
conditional sales contract
, in which the purchaser does not receive title to the equipment until it is paid for; and the
chattel-mortgage contract
, in which the equipment becomes the property of the purchaser on delivery, but the seller holds a mortgage claim against it until the contract amount is fully paid.
 
SAVE
 
How can you keep equipment costs way down? Consider launching from a business incubator, where services, facilities and equipment are shared among several businesses. (For more on incubators, see Chapter 17.)
There are also lenders who will finance 60 to 80 percent of a new equipment purchase, while you pay down the balance as a down payment. The loan is repaid in monthly installments, usually over one to five years, or the usable life of the equipment. (Make sure the financing period doesn’t extend past the usable life of the equipment; you don’t want to be paying for something you can no longer use.)
By using your equipment suppliers to finance the purchase, you reduce the amount of money you need upfront.
When Lease Is More
 
Another way to keep equipment costs down is to lease instead of buy. These days, just about anything can be leased—from computers and heavy machinery to complete offices. The kind of business you’re in and the type of equipment you’re considering are major factors in determining whether to lease or buy.
If you’re starting a one-person business and need just one computer, for instance, it probably makes more sense to buy. On the other hand, if you’re opening an office that will have several employees, and you require a dozen computers, you may want to look into leasing.
According to the Equipment Leasing Association of America (ELA), approximately 80 percent of U.S. companies lease some or all of their equipment, and there are thousands of equipment-leasing firms nationwide catering to that demand. “[Leasing is] an excellent hedge against obsolescence,” explains a spokesperson at the ELA, “especially if you’re leasing something like computer equipment and want to update it constantly.”
Other leasing advantages include: making lower monthly payments than you would have with a loan, getting a fixed financing rate instead of a floating one, benefiting from tax advantages, conserving working capital and avoiding cash-devouring down payments, and gaining immediate access to the most up-to-date business tools. The equipment also shows up on your income statement as a lease expense rather than a purchase. If you purchase it, your balance sheet becomes less liquid.
PACKAGE DEAL
 
A
s you put together an equipment leasing package, consider these issues:
• What equipment do you need and for how long?
• Do you want to bundle service, supplies, training and the equipment lease itself into one contract?
• Have you anticipated your company’s future needs so you can acquire adequate equipment?
• What is the total payment cost?
Also ask the following questions about each leasing source you investigate:
• Who will you be dealing with? Is there a separate company financing the lease? (This may not be desirable.)
• How long has the company been in business? As a general rule, deal only with financing sources that have been operating at least as many years as the term of your proposed lease.
• Do you understand the terms and conditions during and at the end of the lease?
• Is casualty insurance (required to cover damage to the equipment) included?
• Who pays the personal property tax?
• What are the options regarding upgrading and trading in equipment before the lease period expired?
• Who is responsible for repairs?
 
Leasing also has its downside, however: You’ll pay a higher price over the long term. Another drawback is that leasing commits you to retaining a piece of equipment for a certain time period, which can be problematic if your business is in flux.
Every lease decision is unique, so it’s important to study the lease agreement carefully. Compare the costs of leasing to the current interest rate, examining the terms to see if they’re favorable. What’s the lease costing you? What are your immediate and long-term savings? Compare those numbers to the cost of purchasing the same piece of equipment, and you’ll quickly see which is the more profitable route.
 
e-FYI
 
Want to figure out how much your equipment leasing costs will be? Visit
MoneySearch.com
to use their free lease calculators (
moneysearch.com
).
Because startups tend to have little or no credit history, leasing equipment is often difficult or even impossible. However, some companies will consider your personal, rather than business, credit history during the approval process.
If you decide to lease, make sure you get a closed-end lease, without a balloon payment at the end. With a closed-end lease, nothing is owed when the lease period ends. When the lease period terminates, you just turn the equipment in and walk away. With an open-end lease, it’s not that simple. If you turn in the equipment at the end of the lease, but it’s worth less than the value established in the contract, then you’re responsible for paying the difference. If you do consider an open-end lease, make sure you’re not open to additional charges, such as wear and tear.
Finally, balloon payments require you to make small monthly payments with a large payment (the balloon) at the end. While this allows you to conserve your cash flow as you’re making those monthly payments, the bad news is, the final balloon payment may be more than the equipment is worth.
There are many different avenues through which you can secure an equipment lease, including:
• Banks and bank-affiliated firms that will finance an equipment lease may be difficult to locate, but once found, banks may offer some distinct advantages, including lower costs and better customer service. Find out, however, whether the bank will keep and service the lease transaction after it’s set up.
• Equipment dealers and distributors can help you arrange financing using an independent leasing company.
• Independent leasing companies can vary in size and scope, offering many financing options.
• Captive leasing companies are subsidiaries of equipment manufacturers or other firms.
• Broker/packagers represent a small percentage of the leasing market. Much like mortgage or real estate brokers, these companies charge a fee to act as an intermediary between lessors and lessees.
 
SAVE
 
Turning off your computer at night, on average, can save you more than $100 a year, and using fluorescent lights instead of 100-watt bulbs can reduce your lighting costs by two-thirds. However, certain types of fluorescent lights cause added eye strain, so if you’ll be spending 8 to 12 hours per day in a work space with minimal natural light, you might want to splurge on lighting that won’t give you a headache or cause added eye stress over time.
For more information on leasing, the ELFA in Arlington, Virginia (
elfaonline.org
), and the Business Technology Association (BTA) in Kansas City, Missouri (
bta.org
), offer member directories. The ELFA allows you to personalize your directory and pay for only the information you need, which could result in paying well under $100 or well over. The BTA offers informative resources and publications to the public for free; however, only subscribing members have access to its membership database.
Wise Buys
 
If your calculations show that buying makes more sense for you, you’ve still got some decisions to make. First and foremost, where to buy?
Buying New Equipment
 
The same piece of new equipment that costs $400 at one store can cost $1,000 at another. It all depends on where you go. Here are some of the most common sources for new equipment, with a look at the pros and cons of each.
•
Superstores.
Office or electronics superstores usually offer competitive retail prices because they buy from manufacturers in volume. Most superstores offer delivery, installation and ongoing service contracts for the equipment they sell. However, you’re unlikely to find knowledgeable salespeople at superstores, and the prices will almost always be higher than shopping online. It is convenient, however, to walk into a store and walk out with your purchase a few minutes later (rather than waiting up to a week for shipping).
•
Specialty stores.
Small electronics stores and office equipment retailers are likely to offer more assistance in putting together a package of products. Salespeople will typically be more knowledgeable than at superstores, and service will be more personal. Some even offer service plans. On the downside, prices go up accordingly. Unfortunately, many of these smaller, independently owned and operated specialty stores are going out of business because they can’t compete with online vendors or the superstores.
•
Dealer direct sales.
Many manufacturers choose this option as a way of maintaining their service-oriented reputation. On the plus side, you’ll get assistance from highly knowledgeable salespeople who can help you put together the right system of products. You may also get delivery, installation and training at no extra cost. Many entrepreneurs swear by this method of buying. The downside: Since you’re dealing with one manufacturer, you won’t get to compare brands. Apple is the perfect example of a major computer company that has its own chain of retail stores, plus sells directly to consumers online.
•
E-tailers.
Without incurring the overhead of a brick-and-mortar store, online equipment sellers are able to offer brand names at much lower prices than retail stores. To shop efficiently online, you must know exactly what you want to purchase (make and model numbers, for example), then shop around for the best prices and the most reputable online dealers. Use price-comparison websites, such as Nextag (
nextag.com
), to compare multiple vendors and their prices, and you could wind up saving 20 to 60 percent off your purchase. Shopping online also works for office supplies, such as toner or ink cartridges. A toner cartridge for a brand-name laser printer might sell at Staples or Office Max for $89 but be available online for $29 (or less).
BOOK: Start Your Own Business
10.46Mb size Format: txt, pdf, ePub
ads

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