As a small business owner, you can be aware of how equipment can play an important role in the operation and success of your small business. Equipment can consist of anything from a computer system, printers, furniture, machinery and more.
So how does one can buy, replace, restore or upgrade the equipment that is essential to manufacture or produce your product? Some small business owners may possibly not have the cash to buy the equipment outright, or possibly they do not want to tie up all their working capital.
There are two type of funding options available to small business owners when it comes to financing equipment, get a business loan to buy the equipment or lease the equipment. So which one best fits your small business?
First, let’s get back to the basics. Equipment financing is a process of extending capital to a business for the reason of getting the needed equipment. What’s equipment financing and equipment leasing?
Equipment loan is a funding to purchase any piece of business equipment, which is secured by the equipment itself. In equipment loan settings, your business owns the equipment. The lender provides the amount to buy the required equipment that you pay back in time with interest. In case you fail to pay the loan, the lender can take the possession of that equipment.
However equipment leasing on the other hand, is basically a settlement to lease the equipment. You make monthly payments to maintain the equipment in your ownership and at the end of the contract, you may have the option to renew or cease the lease, or have an option to buy the equipment at marketplace value outright. There are advantages and disadvantages to each; the key is to pick out the option that makes the most sense to your small business.
What Are The Major Benefits Of An Equipment Loan?
Equipment loans are relatively quick to acquire, usually in only a few days, and require less documentation as compared to any traditional loan since the equipment itself is playing the role of collateral. This can be good for both start-ups and growing small businesses.
Equipment loans allow small business owners to keep more cash accessible to fulfill working capital requirements. Some type of down payment normally is required, and there will be principal and interest payments to pay back the loan over time, however payment terms can be flexible with monthly, seasonal or even quarterly payments.
Additionally, there are some tax incentives of up to $500,000, which allows some, or in some cases all, of the financing to be tax deductible. The largest disadvantage may be in case your equipment does become outdated or flops, you could still be paying equipment that’s not a benefit to your small business.
What Are The Major Benefits Of Equipment Leasing?
A leasing program allows you to lease equipment, commonly at a decrease monthly payment as compared to a loan, while not having to place a down payment toward the equipment. This allows your small business to maintain more cash available for the working capital requirements for your small business.
There also are tax benefits related to a lease program, and small business owners may be able to claim the lease payment as a tax deduction. Possibly the best advantage of a leasing is that it allows a small business owner to stay updated with the latest technology. If equipment can come quickly outdated, you can renew it with equipment leasing program.
When considering getting a new equipment for your small business and the way to finance it, here are some factors to consider:
- What potential sales will new equipment generate in your small business?
- How quickly will that equipment become obsolete?
- What size of business equipment you will need?
- Who will be accountable for the maintenance of the equipment?
- How will the overall costs affect the outcome of your business?
Equipment financing can be acquired from a variety of lending sources, including banks, credit unions, alternative lenders, and equipment financing firms. First, choose between loan and leasing carefully as per your requirement and then go for it.