Are you ready to buy your first embroidery machine? Are you unsure of the best way to pay for it? Explore some of the benefits of purchasing your machine with a lease instead of buying it outright or using your personal line of credit.
In the embroidery industry, it is common for shop owners to lease their equipment, and the most significant benefit of doing this comes down to the tax savings. Leasing your equipment allows you to write off 100% of the lease payment plus interest in the first year (thanks to the Section 179 tax deduction) without tying up your working capital.
So, how does this help you? The benefit of using Section 179: You get to deduct the cost of eligible equipment immediately. By contrast, most business-related equipment requires depreciation over the course of its useful life. For example, say you buy an embroidery machine for $40,000 that would typically require straight-line depreciation over seven years. Without Section 179, you’d only be allowed to deduct $5,700 each year over the seven years. With Section 179, you get the entire $40,000 deduction upfront, giving you more immediate tax savings.
Let’s say you’ve saved a substantial amount of money to either start your business or add on to your existing business. The general way of thinking is, “If I pay cash for my equipment, I won’t be going into debt, and I can be payment-free.”
While there is nothing wrong with this theory, if you’re starting a new business, you also have to think of all the expenses you will have on top of purchasing your embroidery equipment. If you start a new business, you should be prepared to not “make” any money within the first three months. However, during this time, you still need to pay for things like supplies, blank garments, rent, utilities, wages, etc. Having the ability to use your stashed capital to pay for these things while you are getting started is very important to your business’s overall success.
Often, people starting or adding to a business are tempted to use their personal credit line to purchase new equipment. It’s very tempting to do this when most personal credit lines charge 4-6% interest, which is usually lower than an equipment lease’s interest rate.
The main problem is that you are tying up an alternative option for more capital when you need it. Let’s say you land a new client that needs 5,000 pieces embroidered. Unless you require your customers to pre-pay for their order, you need to have available funds to purchase supplies and blanks to fill this order. That would be a much better use of your personal line of credit than using it to purchase new equipment. The second problem with going this route is that a “personal” line of credit is guaranteed by you. If things should happen to go sideways in your business, you are the one on the hook for the debt instead of your business.
If you have less than stellar credit, it may not affect your eligibility to secure an equipment lease. If you have been in business for more than two years and have established some good business credit, some leasing companies may not even have to pull your personal credit at all and can give you an approval based on your business credit alone. If the leasing company you’re working with does require you to use your personal credit, you can still get approved with as low as a 600 credit score or sometimes less, depending on a few factors.
At this point, you’re probably wondering which leasing company to choose. We’ve worked with various companies over the years, and we recommend a few to our customers. When shopping for a lease, make sure you actually own the equipment at the end of the lease. Sometimes leasing companies structure their leases in a way that still requires you to make a significant “buyout” payment at the end of the lease term. The companies below offer a program called a “$1 buyout lease,” which enables you to “purchase” the equipment for $1 at the end of the lease term. This ensures you own the equipment free and clear once the lease is paid out.