Equipment Leasing Vs. Equipment Financing: Which One Is Better?

From a small business standpoint, several types of equipment are considered necessary for a business. This equipment includes machinery, company cars, office fixtures and furniture, HVAC units, computers, etc. A company may require equipment leasing vs. equipment financing to own all of this.The prices of such equipment can accumulate a lot, and it can be very difficult to finance everything using your funds fully. That is where equipment leasing vs. equipment financing comes into the equation.

Equipment financing is much like business loans, and equipment leasing falls under the category of the rental agreement. Both of these loans can assist you in getting your equipment in distinct ways. We will tell you the advantages and disadvantages, along with which of these make better sense for your company.

Equipment Leasing Vs. Equipment Financing

If you believe that the equipment you require will turn outdated in a matter of a few years, then you should avoid buying that equipment. Rather, you can choose the option of equipment leasing, which lets you use any equipment you need for a fixed period, such as computers, slushie machines, etc. Generally, the equipment leasing contracts can last anywhere between two to seven years, but they will not outwear the equipment’s cost. Equipment leasing or equipment financing provides tax incentives.

When comparing equipment leasing vs. equipment financing, the latter assists small businesses in paying for the equipment over time. Equipment finance is ideal if the equipment is durable and can maintain its value for a long time, like furniture, tractors, and trucks. If the lender authorizes your loan application, they will give you 80 to 100 percent of the money you require to purchase your equipment.

Equipment Leasing Vs. Equipment Financing: Advantages

There are several benefits of Equipment Leasing, such as-

1. No Collateral Or Down Payment Necessary

If you are searching to invest in a piece of expensive equipment, there are several reasons to consider equipment leasing. The first reason is that equipment leasing does not need additional collateral or money to secure it. That means you can retain a good amount of money for other projects and company needs. Furthermore, you do not have to put any of your personal or company assets at risk to get a rental agreement. 

2. Simple Application Procedure

Applying for equipment leasing is a simple task, and you probably won’t require a lot of paperwork as you would if requested for traditional bank loans. Additionally, equipment financing is accessible for individuals with low credit scores. 

3. Restorations Are The Lessor’s Liability

When you take a loan for a piece of equipment, you also take its complete responsibility till the contract period lasts. If the equipment needs repairing or stops running, you must fix it. But when you lease equipment, the leasing company is responsible for any repair work. This is much like living in an apartment, where the landlady probably takes care of repairs for renters.    

4. Flexible Conditions:

Several lease agreements incorporate several choices after the contract ends. You can select from:

  • Buy the equipment. If you want to purchase the equipment you have been renting, the lender can give you the equipment’s title. 
  • You can further your contract for a fixed period again.  
  • Return the equipment to the lender.
  • You can switch to a piece of updated or new equipment (but with a new lease). 

Now that you know what are the advantages of equipment leasing. Let’s look at the equipment financing advantages.

1. Simple To Qualify

Equipment loans are often easy to qualify for compared to traditional term loans. And equipment lenders are quick to provide company owners with challenged credit. All this is because, in equipment loans, the equipment itself as collateral. So, if a borrower fails to pay the loan, the lender can take control of the equipment and liquidate it to get the money.  

The built-in safety precaution makes it easy for lenders to give money without collateral. And therefore, equipment lenders are less rigid with things, such as the years the company has been in business, annual revenue, and the owner’s creditworthiness. 

When reviewing a loan candidate, the equipment financing companies are mostly bothered with the resale value and condition of the equipment. The finer the condition, the better the resale cost and the lower the interest rates. The resale value leads to the lender’s decision on how much money he can give you; the lower the resale value, the lesser amount they will give. 

2. No Collateral Required

Because the equipment works as collateral in this, the loan agreement likely will not ask you to keep something extra to acquire the loan. 

3. Relatively Low Cost

Similar to other loans, you will have to pay interest in addition to the principal loan money. The interest rates for equipment loans can go as high as 30% and as low as 8%. The interest rate is below regular short-term loans, even at the higher end. Typically, the long-term amount of the equipment is lesser than the lease.

Read Also: SBA Financing: Definition, Advantages, & How To Apply

Equipment Leasing Vs. Equipment Financing: Disadvantages

The biggest drawback of equipment leasing is its cost. As a lease is not a loan, you don’t have to pay any interest on the monthly payments. Nonetheless, lenders will combine an effective interest rate into your monthly payments. This technique is how the lenders earn money in these deals. 

The equipment leasing cost will be based on a few elements in your leasing application, such as your company’s annual revenue, the years, and personal credit score. But the biggest factor that leads to the final price offered by the lender is the value of the equipment they are purchasing, the period of the contract, and how good or bad the condition of the equipment is.  

Based on the final cost of your monthly payments, you might end up paying considerably more throughout your equipment lease than you would if you had taken an equipment loan. Afterward, you will repay the whole loan money and interest over a pre-established period. The loan length is based on how long the lender thinks the equipment you buy is useful. Once you have fully paid your loan, you will be the sole owner of the equipment. 

Equipment financing has its disadvantages. Let’s look at those.

You May Need A Down Payment

If your application is accepted for an equipment loan, the lender may offer you 100% money for your equipment, but that is not the case normally. Lenders commonly give about 80% of the money required for equipment, meaning it is your responsibility as an owner to pay the rest, 20%.  

The great news is that the larger the money you can bring as a down payment, the lower the interest rates you will get on your loan.

You Are Stuck With the Equipment

Before applying for a loan to purchase a particular piece of equipment, ensure that the equipment will keep its value by the end of the loan contract. Or else, you can get stuck with an outdated tool and may have to buy a new one to replace it.  

Equipment Leasing Vs. Equipment Financing: Which Is Ideal For Your Business?

If you are looking to buy new equipment as soon as possible but don’t have sufficient funds to pay for it, you don’t need to worry about it. You have choices. The solution is to decide between equipment leasing vs. equipment financing.    

To assist you in choosing, evaluate these two factors: how much funds do you have with you at the moment; and how fast the equipment you are looking at can get outdated.   

If you have sufficient funds to give as a down payment and the equipment you need will stay in business for a prolonged time, then equipment financing is your best bet. However, if you don’t have enough money or the equipment you need will quickly turn outdated, then it would be beneficial for you to consider equipment leasing. Equipment leasing and equipment financing can also provide tax incentives.

Conclusion

If you are unsure what to select between equipment leasing vs. equipment financing, then you can head over to Alnicor Consulting. At Alnicor, the experts can suggest the best option between the two. Remember that equipment leasing and equipment financing can also provide tax incentives. To know everything about leasing and financing, you should speak to an expert. We can assist your business to spread out and get it financed easily.

Leave a Comment

Your email address will not be published.