Direct Financing Explained
By now, nearly every business owner has come to realize the benefits of leasing equipment, rather than purchasing it outright, especially if you have limited funds at your disposal. There is one particular type of leasing arrangement, known as direct financing, which, in some circumstances, can actually generate an income stream through its use. We will explain how it works here, so that you can see if this type of financing arrangement would work with your business venture.
Want to know more about direct financing, and whether it could help your business achieve its goals? Everyone at Sun South Leasing is experienced in creating the right purchase or lease options for their customers. Call us today for a complete breakdown of your financing options.
What is Direct Financing?
Direct financing, otherwise known as a direct lease, is a type of lease that at its essence is a non-leveraged lease. The entity leasing the equipment is neither a dealer, nor manufacturer of the equipment and is done with the intention that the entity leasing it will be purchasing it at the end of their lease but in the meantime they will be leasing the equipment out to a unspecified third party, rather than for their own use. Once their lease is complete, they will own it and can continue to lease it to whomever they wish.
Why Opt for Direct Leasing?
If you are in the business of contracting or leasing equipment or software regularly to a third party but cannot afford to purchase the items you wish to lease out on your own, you can use the direct lease method to finance your purchases.
Most companies that practice this type of business lease may require some kind of assurances or type of collateral but in the end, this often works out to the advantage of everyone concerned. At minimum, the leasing agent you finance this equipment leasing agreement through wants assurance that your payments to them will be met without fail, regardless of how your contract with the third party turns out.
How Direct Leasing Works
A great example of a business that would enter into this type of equipment leasing agreement would be a computer consulting firm.
Let’s say they specialize in a particular brand of computer equipment, networking hardware or specialized software and want to offer their clients up-to-date items but cannot afford to purchase enough of it outright to maintain a decent inventory.
By leasing what they need from an outside firm through a direct financing lease, they can get the inventory they need at a price they can afford. In turn, they lease it all out to their clientele for an amount that covers their lease payment plus a profit and they have established an income stream that will also guarantee that the original leasing agent gets their monthly payment without fail.