Many business owners want to modernize their equipment in order to keep up with the competition. However, most businesses won’t be able to outright purchase the equipment they need, because they don’t have enough funds in reserve to do so. Used equipment financing helps businesses purchase the equipment they need without having to pay for it in cash.
This article will walk you through five reasons why it’s better to have the equipment you want to be financed, rather than buying it in cash or delaying the opportunity to grow your business.
The Difference Between Equipment Loans and Equipment Leasing
There are two different types of equipment financing options: equipment loans and leasing. Here’s how both options differ from one another:
With equipment loans, you’ll receive a lump sum of cash that you borrow from a lender, just like most business loan options. However, you should only use the funds for equipment purchases. Equipment loans let you use the funds to buy equipment and pay for it upfront.
The equipment you’re looking to purchase serves as collateral that secures the loan. This feature is beneficial for business owners who don’t have enough business assets to secure a loan. Additionally, lenders base the terms of your loan on the value of your equipment. However, lenders may ask you to pay a down payment, usually 20% of the total value of the equipment. This varies from lender to lender, so be sure to ask about it before committing.
On the other hand, an equipment lease work similar to a car lease plan. You make fixed monthly payments to a leasing company to cover equipment rental payments. Business owners often negotiate terms with the leasing company to set up the monthly rental payments, as well as the length of the leasing term.
With equipment leasing, you don’t make an upfront purchase. This allows you to upgrade outdated equipment without putting a dent on your cash flow. Once you’ve reached the end of your lease, you have three options: extend the terms of the lease and continue to use the equipment and make monthly payments; end the lease and return the equipment; or buy the equipment.
Why It’s Better to Lease than to Pay Upfront
Now that you know the difference between an equipment loan and a lease, here are five reasons why it’s better to lease equipment.
1. Your business needs cash for daily expenses
Business owners need cash for their daily business expenses. It is important to have liquid capital on hand, in case of immediate repairs or a company emergency. It will financially impair your business if you purchase the equipment in cash, even in the event of a need for an upgrade. Equipment financing is a great opportunity to avoid sacrificing your business’ cash reserves, as well as the opportunity to increase sales and improve your service.
2. Your business needs cash during slower seasons
If your business is machinery and equipment intensive, it is also very capital intensive. You need capital to make sure everything runs smoothly in the business, especially when some of your receivables are delayed. During these times it’s imperative you have the cash on hand to meet this state of affairs.
3. You won’t have to sacrifice quality
Having a limited budget also limits you from getting the equipment that’s just right for your business. Having the equipment you want to be financed will help you get the equipment your business needs without draining your budget. This is a win-win situation for your company. You get the equipment your business needs, while you also get to keep the cash needed to keep your business operating smoothly. This will go a long way and provide you with the flexibility to grow your business.
4. Build your credit
We all know how important it is to have a good credit score; this is especially true if you are a business owner. Financing is relative to the business owner’s and the companies credit score. This means, that if you have a good credit history, your business won’t have any issues financing a large sum of money if the equipment requires it. Equipment loans are very useful in capital-intensive businesses that involve machinery.
5. You can reduce the amount of taxes you pay
There are additional benefits to taking an equipment loan. Leasing contracts will allow you to get additional costs deducted from your earnings. This can help you reduce the amount of taxes you would normally otherwise pay. You can talk to an accounting professional and ask for advice regarding this matter and to help you understand how it works. Do not miss this opportunity to save money!
To lease equipment or not to lease? The answer to that question depends on the needs of your business. While leasing has its benefits, at the end of the day, you know what’s best for your company. Be sure to evaluate your business and assess your needs. It also helps to work with a reputable financial advisor to guide you throughout the entire equipment financing process.