➥ Any equipment integral to your business operations can be viable for many different funding options.
➥ There are two options for obtaining funding for business equipment: equipment financing and equipment leasing.
➥ When it comes to equipment financing, you don’t always need to buy brand new equipment. A more cost-effective option for your business is used equipment financing.
If you’re a small business owner, then you need to know that there are several options for you to finance the equipment that your business may need. You don’t always need to spend huge amounts in one go just to upgrade to new equipment.
Two great options are equipment financing and leasing. But before we delve into their definitions and processes, let’s first clearly define what “equipment” means.
While many people think of “equipment” as massive construction equipment or industrial machinery, the truth is that almost any item utilized for business operations can still be considered a piece of equipment.
For example, a baking oven in a restaurant can still be considered equipment. The same applies to computers used by software developers.
While there are no hard and fast rules for whether a business should lease or buy equipment, you need to know the differences to make an informed decision about which method suits your situation best. Understanding the difference will allow you to better meet your equipment financing needs.
In this article, we’ll go through more about how equipment leasing and financing work, as well as some of the benefits and drawbacks of leasing or financing, used equipment.
An Overview of Equipment Leasing and Financing
First, it’s crucial to understand what counts as “equipment” when it comes to equipment financing and leasing. This can pertain to more than just a construction equipment loan (or a loan to buy construction equipment). As mentioned above, any type of equipment integral to your business operations can be included in this type of financing.
This means any tangible asset utilized in your business–except real estate property–is included. Some other examples are desks for a growing office, a specific type of oven for specialty restaurants, a dental X-ray machine for clinics, or a large milling machine for construction. All these are considered business equipment.
Many companies choose to finance the purchase of expensive equipment to spread the cost throughout the asset’s lifespan, making it more affordable. Your business may also choose to finance the purchase of equipment to free up funds to invest in other areas of the company. As a result, equipment financing is a viable option.
What you should know is that when it comes to obtaining funding for business equipment, there are two options:
- Equipment Financing
- Equipment Leasing
Here are some key points you should remember about each type of financing. These will then help you decide which option is best for your small business:
Understanding Equipment Financing
Equipment loans can come from a variety of places and lender types. You may choose one depending on your credit history and the type of equipment you’re looking to buy.
Among these sources are:
● Banks specializing in commercial transactions
Equipment loans can often be for smaller amounts than regular bank loans, depending on the type and cost of the equipment you want to purchase. This could make traditional financing an option for qualified small business borrowers, which can boost your credit score.
● Online or alternative lenders
Online lenders also provide equipment financing. Their rates and periods vary based on the lender you choose, just as they do with traditional lenders. Although interest rates may be higher, online lenders are known for their speedy responses and processes. Most respond within an hour and may deposit funds to your bank account within a day or two.
● Credit unions for small businesses
If you want to apply for an equipment loan from a credit union, what you need to keep in mind is that you must first become a union member.
● SBA loans are backed by the government.
SBA loans have different types, which is why loan terms will differ.
For example, a 10% down payment is required for an SBA 504 loan. Compare these with other lenders, as most traditional lenders will ask for a down payment, likely 20%of the loan upfront. As with most loans, the interest on an equipment loan is tax-deductible.
The loan that you may choose ultimately depends on the piece of equipment that you intend to buy.
You should also know that equipment loans have different terms, depending on the lender. For example, in the case of a construction equipment loan, the equipment can occasionally be used as collateral. This is also called a secured loan.
Most commercial loans have a maximum repayment term length (or duration) of seven years. Interest rates can also vary greatly based on the lender, your credit history, and the amount borrowed.
Understanding Equipment Leasing
The term “leasing” is similar to renting. The difference is that with a lease, the lender buys the equipment and then leases (or rents) it back to you for a fixed monthly cost. This cost is often less than the actual total loan payment.
The majority of equipment leases have a fixed interest rate and term, although they might vary based on the lender, as well as your credit history. You should also be aware that it’s common to find prices ranging from the high single digits to the double digits, so it’s a good idea to browse around before making a decision. Also, you may be able to just purchase the equipment at fair market value or for a predetermined price when the lease ends.
Many equipment vendors have an in-house leasing department or partner with external leasing businesses. All this can help speed up the application process and make the leasing process a lot more efficient.
You need to note that since a lease isn’t classified as a loan, it won’t show up on your credit report.
Standard lease lengths are similar to a loan and may go up to three, seven, or even ten years long. Your lease payment may also be tax-deductible as a business expense. However, it’s best to consult with your tax advisor about this.
Although a lease isn’t listed as a loan on your credit record, note that regular and timely payments will most likely be reported on your business credit report, as any other revolving debt. However, this only applies to leasing companies that report to business credit bureaus.
Should You Finance or Lease Equipment?
You should know that there is no hard-and-fast rule for what type of equipment is best suited to a lease versus one that should instead be bought. However, some types of equipment may be better suited for a lease due to having a much shorter lifespan. Some examples of such equipment are high-tech gadgets, computer software, and some types of medical equipment. These also include equipment types always used, as they are more subject to early wear and tear.
For you to have a better idea of whether to finance or lease equipment, here are their advantages:
Advantages of Equipment Leasing over Financing
- Leases are usually more easily approved than most types of term loans.
- When compared to equipment financing, leases often have more flexible terms.
- Some leases need no down payment.
- You may be able to better specify or adjust your lease terms, which will allow you to exchange or upgrade the piece of equipment after a set period of time.
- In some cases, the entire lease payment may be tax-deductible rather than just the interest on an equipment loan. However, it’s best to first consult with your tax advisor.
Advantages of Equipment Financing over Leasing
- In some cases, equipment leasing may be more expensive than equipment financing, especially when the total loan costs are calculated.
- If ever you find that you don’t need the equipment anymore before the end of the lease period, you may still need to continue paying lease payments.
- Equipment financing may be more cost-effective. This is because even if a lease agreement may include provisions that let you own the equipment at the end of the lease, the entire amount of your lease payment may not be tax-deductible.
A Closer Look at Used Equipment Financing
New computers and gadgets may come with the most up-to-date features and capabilities. However, they also usually come with hefty price tags. Your business may better benefit from a less expensive secondhand piece of equipment, though this depends on your industry, the type of equipment, as well as your business’s demands.
If you want to consider used equipment financing, however, here are some of the advantages:
- Compared to new equipment and gadgets, the initial cost is significantly lower.
- Compared to new equipment, used equipment also has a lower depreciation rate.
However, you should opt for new equipment if you want:
- Better features and possibly better energy efficiency
- Features that can improve productivity and output
- Lower maintenance or repair costs
To better know whether to go for new or used equipment, you need to understand your business’s objectives and challenges. You should also check the market for all available options. Lastly, you need to find the right lender or funding partner so you can be provided with the best possible ways forward.
If you own a small business and need to upgrade your equipment, you may consider equipment leasing or equipment financing. Both have their benefits and disadvantages, so you need to look at your situation closely to know which options suit you best. You don’t need to always go for new equipment, though, as used equipment financing provides cheaper options for your business to access the equipment you need.