For a business’ growth and expansion, its ability to access equipment is integral. However, most equipment is highly-priced, making it difficult for a new business to advance. Today, almost every industry and service sector is financing equipment. The most financed equipment types include construction, transportation, IT services, industrial/manufacturing, and agriculture.
Purchasing office supplies, semi-trucks, and other machinery would be challenging if a business has a tight budget. With equipment financing and leasing, you can meet business equipment necessities without burning a hole in your pocket.
Who Qualifies For Equipment Financing And Leasing?
Here are a few similar requirements to meet for equipment leasing and financing:
- Yearly revenue of 50000 USD or more
- Minimum two years of business experience
- Personal credit score must be in the good to excellent range
What’s the difference between an equipment financial agreement vs lease? Let us find out with this write-up.
What Is Equipment Leasing?
With Equipment leasing, you can access much-needed equipment without paying any higher per-month cost associated with a loan. There are times when businesses can even avert a down payment. Thus, it saves them thousands of dollars.
Buying a piece of equipment outright or affording a down payment is a common choice for businesses holding no capital. The business will either rent and return the equipment or buy it with a balloon payment as the lease ends. However, this depends on the lease type.
In equipment leasing, you might be liable for maintenance and other taxes. Still, overall, leasing is deemed a less expensive option than financing. Let us now discuss different types of leases.
- Capital lease: In a capital lease, the investor buys equipment after the lease period. They have to pay taxes and insurance and maintain the equipment. They can count the equipment as a liability. As the lease period ends, the investor can buy it. They can make a balloon payment, which implies owning the remainder amount that was not paid through the lease altogether.
- Operating lease: An operating lease is a rental agreement for a short term. It functions similarly to a consumer lease. You can leave it at any time, and with an operating lease, you are also not responsible for paying for maintenance. However, you can’t buy equipment under an operating lease at the end of your lease period. In addition, you cannot count it as a liability for tax purposes.
What Is Equipment Financing?
The procedure to borrow money to pay for equipment or machinery is called equipment financing. For business, these are very convenient.
A loan lets you own the equipment outright if they are unlikely to become outdated or cannot be further repaired. As you are the owner, you can utilize or sell it.
You must manage your equipment loan smartly and avoid any late payments. Any delay in the payments may result in impacting your credit score. The per-month payment on an equipment loan is higher than a lease. So, you must control your cash flow cautiously to make full payment.
There are various sources through which you can get an equipment loan. These include banks and alternative lenders. You can even obtain an equipment loan directly from the seller. However, that depends on the equipment type you want to buy and the seller’s business size.
If you want equipment loans through banks, you have to fulfill more rigid criteria to be eligible. But, owing to this, the rates they offer might be more competitive.
Equipment Finance Agreement Vs. Lease: Factors Affecting the Choice of Obtaining an Equipment Loan
Businesses often avoid the utilization of personal or business cash for purchasing equipment. This is because they want to keep up a positive cash flow to cover other liabilities, including rent and employees’ paychecks. Therefore, they choose any of the two most popular financial tools: equipment finance agreement vs lease.
Here are all the factors affecting the choice:
- Type of equipment required
- Equipment resale value
- Repair and maintenance cost of the equipment
- The usage cycle of the equipment
- As the business owner has determined these factors, they can decide whether to lease or finance the equipment.
Pros of Financing Business Equipment
The equipment a business owner purchases through the loan amount is automatically considered a surety. With equipment financing, you can set up custom-made payment plans, maintain a cash flow, and acquire much-needed materials for business. Here are the top advantages of an equipment finance agreement:
- The business entirely owns the equipment and may utilize it in any way.
- The rates of interest on business equipment loans are minimal and come with repayment flexibility.
- Compared with equipment leasing, business owners don’t have to look for equipment owners willing to lease.
- The business owners can reclaim the interest rate by a margin through equipment reselling.
Pros of Leasing Business Equipment
Businesses of nearly every type can gain the benefits of an equipment lease. The business owner can buy the equipment from the lenders at the prevailing market rates. Moreover, they can also renew the lease for some more years. Other advantages of leasing business equipment are as follows:
Losses because of depreciation in the value of the equipment can be avoided.
- The cash flow of the business does not suffer because of equipment leasing.
- To lower monetary liabilities, the business owner can end the lease agreement at any time.
- There is also no need to panic about reselling the equipment when it has become outdated.
Cons of Equipment Leasing
These are the major disadvantages of leasing business equipment:
- The business owner has to make a balloon payment to buy the equipment.
- No access to the equipment and any remaining amount as the equipment has to be returned to the lessor.
Cons of Equipment Financing
The disadvantages of financing business equipment are as follows:
- It is necessary to pay a down payment
- There is a risk of outdated equipment
- You have to pay a higher per-month expense
Which One Among Equipment Finance Agreement Vs. Lease Is A Better Choice?
The better option between an equipment finance agreement vs a lease depends on the type of equipment required and the pace at which your industry changes.
If the equipment is properly maintained, it will likely operate for decades without any hitch. Thus, it is best for most businesses to go for an equipment finance agreement.
Businesses can lease fax machines or copiers as technology advances quickly, making other machinery outdated.
Equipment finance agreement and lease are the best financial ways to meet your business equipment needs. Buying equipment on lease is highly advantageous as the business owner pays less monthly expenses. Equipment financing, on the other hand, makes you the owner of the equipment as the loan period ends.
But you should also consider other factors like overall costs before deciding on either option. A lease is a better option for businesses with nothing to offer as a down payment. Businesses with excess money for a down payment should go for financing.