Equipment Loans vs. Equipment Lease: Which is Better?

Friday, September 20, 2019, 6:00 AM | Leave Comment

Almost every type of business needs equipment to conduct day-to-day operations. But what happens if you don’t have the cash to purchase it upfront?

Small business owners have two options: equipment loans or equipment leasing.

Both options can finance equipment acquisition – whether you need heavy machinery, vehicles, or computers. But which option is better for your business?

Not many business owners know the difference between equipment loans and equipment leases. In fact, many people think they’re exactly the same.

However, it’s important to know the difference between the two to determine the best equipment financing option for your business.

Equipment Loans

When approved of equipment loans, lenders give you a lump sum so you can purchase the equipment your business needs. Similar to term loans, you borrow a sum of money and repay it at regular intervals until you pay off the entire loan. By then, you’ll fully own the equipment.

An equipment loan is a self-secured loan, which means you don’t have to provide any personal or business assets to secure the loan.

The equipment you’re looking to purchase serves as collateral. If you default on the loan, the lender has the right to repossess the equipment you purchased to cover their losses.

Benefits

    Spend Your Working Capital Elsewhere: With the funds provided by an equipment loan, you don’t have to tie working capital to your equipment. You’ll have the funds you need to purchase the equipment and have enough working capital to fund daily operations.

  • Fewer Documents Needed: With traditional loans, lenders often require extensive documentation, a decent credit score, and healthy cash flow, among others.

    For equipment loans, lenders are not so concerned with your credit rating and financial history because equipment purchased acts as collateral that secures the loan.

  • Tax Incentives: There’s a minimum annual tax deduction of $500,000 if you’re financing your equipment.

Equipment Leasing

Unlike equipment loans, equipment leasing is the type of financing wherein the borrower rents the equipment instead of buying it. You’ll still need to pay a regular payment, but once the term is up, you won’t own the equipment.

Lenders will purchase the equipment and then leases it out to you, but they’ll often ask you to buy the equipment at market value when your term ends.

Benefits

  • Spend Your Working Capital Elsewhere: Just like equipment loans, leasing allows you to rent the equipment you can’t afford to pay out of pocket.

    You generally won’t have to pay a down payment and the regular rates are usually lower than traditional loans. For this reason, you won’t have to tie working capital to a piece of equipment, so you’ll have money to pay for unforeseen expenses, make payroll, purchase inventory, and more.

  • Adapt to Current Technology: If your business needs to have the latest, most cutting-edge equipment, an equipment lease is a better option. It would hurt your business financially if you constantly need to upgrade your equipment every few years.

    With equipment financing, you won’t own the equipment at the end of your lease. You usually have the option to return the equipment you rented and open a lease on a newer piece of equipment. Some lenders even allow you to trade equipment even before your contract ends.

  • Tax Incentives: Leasing the equipment has the same tax benefits as loaning the equipment.

Which is the Better Option: Loaning or Leasing?

Choosing between an equipment loan and an equipment lease depends on your business’ needs and goals.

But to help you choose, it’s important to consider two main factors:

  • How much money does your business have right now?

  • How long until the equipment you’re looking to purchase becomes obsolete?

If the equipment you want to buy will last your business for years (10 years +) and you have the money to make a down payment, then an equipment loan would be a better option.

On the other hand, if you don’t have the funds to make a down payment or the equipment you’re looking to finance quickly becomes outdated, you can lease the equipment instead.

Whether you’re looking to lease or loan equipment, SMB Compass offers equipment financing options for small businesses in the United States.

To know more about equipment loans and leases, simply give us a call at (888) 853-8922 or email us at info@smbcompass.com for a free consultation.

Throw us a like at Facebook.com/doable.finance


Post a Comment on Content of the Article

 

This is not a billboard for your advertisement. Make comments on the content else your comments would be deleted promptly.

CommentLuv badge