Keeping your business running smoothly often relies on having up-to-date equipment. For businesses that depend on trucks and vehicles, this raises the question of financing versus leasing. Choosing the right option can be tricky, and you might have questions about which best suits your company’s needs. While financing and leasing help spread out the equipment cost, there are key differences to consider before deciding. Let’s explore important factors to weigh before financing or leasing business equipment.
What Is Equipment Financing?
Equipment financing is a lifeline for businesses, especially small ones, to acquire the necessary equipment to function. This can be anything from computers to heavy-duty machinery used in manufacturing. It works like a loan, allowing businesses to spread out the cost of the equipment over a set period with fixed monthly payments, making it easier to manage cash flow. This way, companies can invest in growth without a large upfront burden.
How Equipment Financing Works
Equipment financing helps businesses acquire essential equipment by spreading the cost over a loan term. Businesses can obtain financing from various lenders, both traditional banks and online platforms. Loan amounts vary depending on the equipment’s price, with terms typically lasting 3 to 10 years to match the equipment’s usable life. While lenders may finance 80% to 100% of the purchase, a 15% down payment is most common.
Interest rates depend on the lender but can range from a low of 2% to as high as 20%. Businesses with good credit may qualify for even more favorable rates through dealer or manufacturer financing programs. Traditional institutions often offer the most competitive terms but have stricter approval requirements. Online lenders can be a faster option with lower credit score hurdles.
Some lenders may finance loans in as little as two business days so that the funding process can move quickly. But this speed varies depending on the lender and the kind of loan. Next, payments are made throughout the selected loan period, from three to ten years. It is crucial to remember that the equipment serves as collateral for equipment financing. The lender may seize and sell the equipment to recoup their losses if a firm fails on the loan.
Tips to Consider Before Financing Business Equipment
- Making the Ownership Call
The choice between financing and leasing equipment boils down to ownership. When you finance, you buy the equipment in instalments, eventually becoming the owner. This eliminates the burden of a hefty upfront cost but requires regular payments. On the other hand, leasing is akin to renting the equipment. You pay for its use but never acquire ownership.
- Preparing Your Financials
Before approaching a financing company, get your ducks in a row. Review your personal and business credit reports and purchase history. This information will be requested, and having it ready streamlines the process. Additionally, shop around for rates and terms from different providers. Like any financial decision, comparing options ensures you get the best deal.
- One Application at a Time
Only blast applications to some financing companies out there. Multiple rejections can raise red flags for future lenders. Research and choose a provider that aligns with your business goals. If things don’t work out, you can always try another, but applying one simultaneously avoids casting doubt on your creditworthiness.
- Long-Term vs. Short-Term Needs
Consider your equipment’s projected use when choosing between financing and leasing. New equipment models emerge constantly in fast-paced industries like construction, and leasing allows for easy upgrades. Financing might be better if you don’t require frequent upgrades and aim for long-term ownership.
- Tax Advantages of Financing
Financing offers a potential tax benefit. Section 179 allows you to deduct the total cost of financed equipment (up to a specific limit) from your taxes in the year of purchase. This can translate to significant savings, making funding an even more attractive option.
Conclusion
Financing business equipment is a significant choice that involves multiple steps. However, understanding the distinction between financing and leasing beforehand gives you a head start. By staying organized and focusing on one provider at a time, you can streamline the process and avoid unnecessary frustration for yourself and everyone involved.
