For a business owner whose primary trade tool is equipment, there is always an emphasis on having enough efficient equipment to get the job done. For those in the transportation industry, this primarily means investing in titled equipment, like trucks and trailers, and effectively managing that equipment throughout its useful life. What many business owners tend to overlook is how the financing of their titled equipment can either help them or hurt them. When financing titled equipment, here are a few issues worth considering:
CREDIT
When purchasing new equipment, credit is always the first step. Without sufficient creditworthiness, you’re unlikely to be able to purchase the titled equipment necessary to operate your business. Review your five “C’s” of credit – credit score, cash flow, capital, collateral, and character – to determine whether or not you may be approved for the amount of financing you need. If you are not in a position to obtain the financing you need, it may be time to learn how to improve your credit.
LEASE VS. BUY
Traditionally, there are two ways to finance equipment – lease it or buy it. Both options have pros and cons with respect to ownership, payment, insurance, accounting, and tax. This is an important decision, especially when businesses decide how best to expand or replace the titled equipment. Leasing can allow a business to afford more expensive equipment without a large cash expense; whereas financing the full purchase price of the equipment gives the business all the benefits of ownership.
PAYMENT
Being able to make the payment on your titled equipment and also generate revenue is crucial to sustaining and growing your business. Several elements can make up a payment, including the down payment, principal, interest, taxes, and fees. What most businesses fail to consider is how alternative financing structures could make the payment for equipment more sensible, like modified payment plans or substitute collateral.
TITLE AND LIENS
When purchasing titled equipment, a business owner should be sure that the equipment is being sold free and clear of all liens. An examination of the title should inform a business owner of any third-party interests or liens on the titled equipment. To extinguish the liens, the third party holding an interest in the equipment should be paid in full at the time of purchase in exchange for a release of the lien. A limited power of attorney may also be necessary to ensure the title of the equipment is fully and accurately transferred to the new owner.
DISCLAIMER OF WARRANTIES AND INSPECTION
A seller and financial institution will generally disclaim all warranties related to the equipment – meaning the business purchasing the equipment is buying or leasing the equipment on an “as is” basis, including all faults. There will also likely be no warranties as to the condition, merchantability or fitness of the equipment. Therefore, it is the responsibility of the purchaser to complete an adequate inspection of the equipment before finalizing the equipment purchase. If you don’t have that expertise yourself, you need someone on your team that does in order to assure you are getting what you are paying for.
TAX
Taxes can be difficult to predict and measure when purchasing titled equipment. Owning or leasing equipment may trigger sales tax, use tax, and property tax. All of which are specific to the jurisdiction where the asset is purchased or located. It is important for a business owner to take advantage of the potential tax benefits or exemptions, such as a qualifying sales tax exemption. There are also potential income tax benefits for a business owner, including the ability to deduct the full purchase price of qualifying equipment from gross income.
ACCOUNTING
Accounting for titled equipment is all about ownership. It can dictate who claims depreciation expense for the equipment and who can treat the costs as deductible business expenses. Depending on the structure of the transaction, the equipment may not have to be recorded as an asset on the balance sheet. In the alternative, the asset may be required to be shown as an asset on the balance sheet and the stream of payments at their respective portions of short and long term liability.
INSURANCE
Insurance is an important tool to protect a business owner’s investment in titled equipment, and it is likely that a lender is going to require adequate insurance on the equipment to also protect their investment. It is common for a lender to require business personal property coverage for the purchase value of the equipment. In a lease structure, it is also common for the lender to require the lessee to obtain general liability insurance. These additional costs in premiums should be considered when purchasing the equipment.
If you are looking at purchasing titled equipment or have questions about the management of your titled equipment, FMJ can assist you. We can assist with completing these transactions by finding a financing structure that works for you and responding to any concerns that come up.
If you have any questions about title equipment financing, contact Kevin Johnson (kevin.johnson@fmjlaw.com).
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