As a business owner, you may be acutely aware of how equipment can play a critical role in the operation and success of your company. Equipment can include anything from phone systems, computer monitors, printers and copiers to furniture, restaurant ovens, cookware, medical machinery, industrial equipment and more. So how does one purchase, replace, repair or upgrade the various equipment that is essential to process, manufacture or produce your product? Some business owners may not have the cash to outright purchase equipment, or maybe they do not want to tie up all their working capital. There are two options business owners have when it comes to financing equipment, take out a loan to purchase the equipment or lease the equipment. So which one is right for your business?
First, let’s get back to basics. Equipment financing is any method of extending capital to a business for the purpose of acquiring equipment. What is an equipment loan versus an equipment lease? An equipment loan is a loan to purchase any piece of business equipment, which is secured by the equipment itself. Your business owns the equipment and reports it as an asset on the balance sheet. The lender provides the lump sum to purchase the equipment, which you pay back over time with interest. If you fail to pay the loan, the lender can repossess the equipment. An equipment lease on the other hand, is essentially an agreement to rent the equipment. You make monthly payments to keep the equipment in your possession and at the end of the agreement, you will have the option to renew or end the lease, or have an option to purchase the equipment at market value. There are benefits and drawbacks to both; the key is to choose the option that makes the most sense for your business.
What are the key benefits of an equipment loan? Equipment loans are relatively quick to obtain, usually in just a few days, and require less documentation than a traditional loan since the equipment will be the collateral. This can be good for both start-up businesses and expanding businesses. Equipment loans allow business owners to keep more cash on hand to meet working capital needs. Some form of down payment typically is required, and there will be principal and interest payments to pay back the loan over time, however payment terms can be flexible with monthly, seasonal or even quarterly payments. There are also tax incentives of up to $500,000, which allows for some, or in some cases all, of the financing to be tax deductible. The biggest drawback may be if your equipment does become obsolete or fails, you could still be paying for equipment which is no longer a benefit to your business.
What are the key benefits of an equipment lease? A lease allows you to rent equipment, typically at a lower monthly payment than a loan, without having to put a down payment towards the equipment. This allows your business to keep more cash on hand for the working capital needs of your business. There are also tax incentives associated with a lease, and business owners may be able to claim the lease payment as a tax deduction. Possibly the greatest benefit of a lease is that it allows a business owner to stay current with technology. If you work in an industry where the equipment can become quickly outdated and/or will need to be replaced fast, a lease allows you to conveniently return the old equipment to lease the newest version. The biggest drawback of leasing is that it can be significantly more costly than purchasing the equipment outright, if you plan on holding onto that equipment long term.
When considering acquiring new equipment and how to specifically finance it, key important factors to consider include:
- What potential revenue will new equipment generate for your business?
- How quickly will that equipment become outdated?
- What size of equipment will you need?
- Who will be responsible for the maintenance of the equipment?
- How will the overall costs affect the bottom line of your business?
Equipment financing can be obtained from a variety of lending sources, including banks, credit unions, alternative lenders, and companies that specialize in equipment financing. When you are ready to seek financing, whether a loan or a lease, make sure you:
- Do your homework on the types and options available for the equipment your business needs. This can be an expensive investment; you want to make sure the equipment you are acquiring will generate more money than it will cost you.
- Do your research on lenders to find the best fit for your business and to find a reputable company / lender.
- Be prepared with your business plan, resume of experience in the industry, business financial statements and ensuring your credit is in order.
- Read any contract thoroughly to be knowledgeable of the terms you are agreeing to. Always get a signed/executed copy once completed.
- Be realistic about rates and terms based on your credit and the state of your business financials.
So what is the right fit for your business? If you are looking to purchase equipment that you do not need to update frequently and want to hold on to long-term, you may be better off acquiring the equipment outright via an equipment loan. If you are rapidly expanding or are in a field such as technology or the medical industry where you need to constantly update equipment, leasing may be a better fit. Each business is unique and every situation is different. It is up to you to weigh your options, do your research and make the choice that best suits your business needs.