Equipment Leasing vs Equipment Financing: Which is Better?
Growing a small business is a challenge for many entrepreneurs. Depending on the needs and size of your business, expenses can be rather large, especially when purchasing large equipment. As a business owner, you may not have the funds you need to purchase those items, which makes equipment leasing an attractive option.
An equipment lease works much like a car lease. You rent equipment for a certain period of time, thus providing you no ownership of the particular piece of equipment. Equipment leasing is just one option to secure necessary equipment; there are other options to consider as well. Here’s what to keep in mind for the equipment financing needs of your business.
Many businesses need some form of financing to run their operations. This is especially the case when it comes to financing heavy-duty equipment. The Small Business Administration (SBA) reports that nearly three-quarters of small businesses used financing in the 2015-2016 fiscal year. Businesses often choose to finance for either expansion purposes or for equipment needs.
Businesses that desire to purchase and own this equipment must often turn to financing such purchases. Financing equipment is much like buying a house or a car. You usually need to get a loan through a bank or the particular equipment company.
The lender will want to take a serious look at your financials, credit history, assets, and cash flow, plus they may ask to look at other items related to your financial picture. You may also need to come up with a down payment for the equipment or have the loan backed by the equipment to secure the items you need.
As with any major business purposes, there will be some pros and cons. It’s important to take a look at the needs of your business before moving forward with financing equipment.
There are many benefits to financing equipment for your business. Here are some of the top benefits:
- You own the equipment once the loan is paid off. You will also be responsible for maintenance and upkeep, but the equipment is yours once the loan is paid in full.
- You may not be required to put money down for the piece of equipment. The lender may not require a down payment, allowing you to back the loan with the piece of equipment. This can be of great help if you do not have the funds necessary for a down payment.
- You can sell the equipment at the end of the loan if you deem it necessary to secure newer technology and recoup some of your cost.
- You may be able to hold on to the piece for years beyond the time that the loan is paid off if the technology on the equipment does not update regularly.
- You can benefit from tax deductions thanks to the purchase by using a section 179 deduction. Section 179 deductions allow businesses to deduct up to $500,000 per year on equipment purchases. The IRS requires you to put the equipment to use in the same calendar year, among other things, so make sure to verify that you qualify for this deduction before financing equipment.
These are just a few of the main benefits of equipment financing. If you value owning the equipment and the potential of not needing a down payment, financing may be the direction to take. Make sure to compare lenders prior to get the best rate possible.
As with any financial decision, there are drawbacks to keep in mind. Here are some of the key drawbacks to equipment financing that you will want to consider:
- You must pay for all upkeep and repair work related to your equipment. This can become costly if the equipment breaks down frequently or repairs are expensive.
- You may own an outdated piece of equipment. This becomes particularly problematic if the equipment is technology heavy. If the technology updates in the near future, you may own an outdated piece of equipment.
- You are still responsible for the loan if the machinery becomes inoperable or out of date. This can put you on the hook to pay back a loan on a piece of equipment that is no longer usable.
- Monthly payments are typically higher than a lease. This can make repayment challenging if you encounter tight cash flow or a slow down in business. Additionally, you may not be able to afford the piece of equipment you need, causing you to pick a less desirable alternative.
- It may be difficult to qualify for a loan or you may face substantial paperwork depending on the amount you are financing or the state of your business.
Keep in mind that all financing situations have benefits and drawbacks. It’s important to do your due diligence to make the best decision for your business.
Equipment financing is just one way to secure the equipment and machinery needed for your business. Leasing equipment is one other popular option used by businesses. As with leasing a car, you don’t own the equipment; you essentially rent the item for a pre-determined amount of time.
Just as with financing, there are many things to keep in mind when considering equipment leasing.
There are many benefits to leasing equipment for your business; here are some of the top benefits to keep in mind:
- No down payment is needed to secure the equipment. You simply make the monthly lease payments. This is great for a business that can’t afford an expensive piece of equipment through financing.
- You get to stay up to date with technology. If you’re in a field that changes quickly, equipment leasing is a good way to keep your equipment current.
- You can take the same tax benefits that are available to those who finance through the section 179 deduction.
- You do not pay for maintenance. Maintenance and repairs are typically handled by the leasing company, not your business.
- Monthly payments are typically lower with equipment leasing, which frees up cash flow.
The benefits to equipment leasing make it a justifiable alternative to financing. If you value staying up to date with lower costs, leasing may be the best option for your business.
Leasing equipment is full of many benefits for most businesses. However, there are some drawbacks to keep in mind:
- You have no equity in the equipment. This puts you on a continuous cycle of making payments and no ownership of equipment. This can also make it more expensive over the life of the equipment versus owning.
- You must pay to purchase the equipment if you decide that you want to own the equipment at the end of the lease period.
- Repairs may be difficult if you disagree with the leasing company on what is wrong with it.
- Available leases may be longer than you need, which can cause problems if you need the equipment for a short period of time.
As with equipment financing, it’s important to do your due diligence prior to leasing equipment.
Which Option is Right for Your Business?
Equipment leasing versus equipment financing is a serious consideration for many businesses. Both are justifiable to pursue, but choosing the wrong option can cause unintended problems for your business.
Before choosing between equipment financing and equipment leasing, you need to consider several factors. Some of those factors are:
- The amount of time you need the equipment
- Your current and near-term cash flow situation
- How fast technology advances in your industry
- Your ability to repair and maintain equipment on your own
- Your credit standing and history
Analyze each of these areas and see where you currently stand. If your needs are more immediate and not long-lasting, you may want to pursue leasing the equipment. If your needs are long-term in nature and you have the ability to handle higher payments, equipment financing may be the better option for your business.
As with any business decision, each situation is unique. It’s important to know the needs of your business and what will put you in the most competitive position before making a final decision.
There are a lot of things to keep in mind when analyzing equipment financing versus equipment leasing. Do your due diligence to make the right decision when choosing your small business loan.