With equipment leasing, you essentially rent your equipment for a specific duration of time. Although you don’t own the equipment, you still have to be responsible for maintaining and insuring it. You may be able to purchase it at the end of the lease, but this could require a substantial payment.
There are some things to consider when leasing. For instance, some lease agreements require a security deposit up front, which you could lose if you don’t return the equipment in good condition. Also, with leasing, you may not have the option to deduct your loan interest and equipment depreciation on your taxes like you possibly can with financing.
Additionally, you may have to put down a deposit or make some payments in advance, which can work out to be more expensive than if you buy the equipment outright. Be sure to go over the contract carefully so that your business doesn’t get locked into an inflexible agreement that’s difficult to get out of.
With equipment financing, your business takes out a loan to purchase equipment for your business. You’ll repay the loan over a set period, along with any interest charges and associated fees. Purchasing equipment can be a better option for equipment that has a long usable life, such as tractors or large machinery. Also, you often pay less overall when you finance because you own the equipment outright once the loan is paid off.
There are several options for financing equipment purchases, including:
Term loans are one of the most widely available funding options for businesses. Your business borrows a lump sum and repays it over five to 10 years on average. You can use it for working capital or large one-time expenses.
Equipment loans are the standard option for financing equipment since the loan is backed by the equipment being purchased. They are widely available from banks and other lenders.
The Small Business Administration (SBA) offers several types of loans that can be used to purchase equipment, including 7(a) loans (for general working capital or to purchase equipment); 504 loans (to purchase large equipment); Express loans (faster approval time); and microloans (for newer businesses, especially those owned by women, minorities and other underserved community, limited to $50,000 for equipment).
A line of credit works like business credit cards. Your business has access to a set credit limit and you can draw and repay as needed. It’s useful for businesses that frequently need smaller equipment purchases. With lines of credit, you only pay interest on the amount you use, and for most business lines of credit, you will regain access to the funds as you pay them back. This gives your business plenty of flexibility based on cash flow and other operating expenses.
Choosing between equipment leasing and financing is a crucial decision that can shape your business’s financial future. The right choice depends on your unique needs and long-term goals, but the key to success lies in staying informed and exploring all your options. Contact our expert commercial banking team who have the experience and training to help you with the fundamentals of growing your business.
