No matter what kind of business you have, chances are that you rely on equipment to serve your customers. Whether it’s managing a fleet of vehicles to deliver products or services, high-end machinery or restaurant equipment, these items can make or break your bottom line.
For many small businesses, the cost of equipment is too high to purchase outright. Instead, equipment financing is a better solution. There are two primary methods available: equipment loans and leasing. In this article, we’re going to break down both options and discuss when each one is right for your company.
Equipment Loans
When trying to buy new machinery for your business, you may be tempted to either put it on a credit card or take out a traditional bank loan. Unfortunately, both options are problematic. Credit cards come with high interest rates, and loans require a credit check and lengthy approval process.
Instead, an equipment loan is a much better solution. Typically, this kind of loan uses the item as collateral and can fund up to 80 percent of the cost. This way, you don’t have to wait as long for financing, nor do you need an excellent credit score. Once the loan is paid off, you get to keep the machinery.
One problem with a standard equipment loan is that it limits your options for upgrades and replacements. Not only that, you are on the hook for any repairs and maintenance costs. Equipment leasing gets around that problem by allowing you to rent machinery for a specified period. The leasing company is responsible for repairs, and you can upgrade to a newer model once the lease agreement is over.
Leasing can also offer flexible financing if you own any equipment outright. Lease buybacks allow you to sell the machinery while keeping it onsite and in use. You get to use the money from the sale to cover operational expenses and also receive the benefits of leasing.
Which is Better?
Since every company’s situation is different, there is no universal “right” answer. In some cases, purchasing new equipment makes the most sense. In other instances, leasing can offer better flexibility. Here’s a quick breakdown of when to utilize these financing options.
Leasing
One situation you never want to find yourself in is having an “upside-down” loan. What this means is that you owe more money than the product is worth. If this does happen, you may end up in a financial bind, since you can’t simply sell the item to pay off the loan.
So, if you’re worried that the equipment will depreciate too fast, leasing is an excellent choice. Similarly, if you think that you’ll need to upgrade sooner rather than later, you want to sign up for a short-term lease.
In some cases, you may be able to sign up for a lease-to-own program. Before taking advantage, however, read the agreement details. Also, make sure that owning the equipment makes sense in the long run.
Purchasing
Typically, a standard equipment loan makes the most sense when buying machinery that will last and that is a primary part of your daily operations. For example, if you are a manufacturer creating machined tools and equipment, purchasing a CNC machine makes sense, since it can be a central part of your operations. Similarly, if you run a restaurant, it makes more sense to buy commercial-grade refrigerators and freezers rather than lease them.
Overall, a loan is the best solution when an item will retain its value and doesn’t have to be upgraded for a while.
Buy Some, Lease Some
For some industries, it makes sense to lease certain items and purchase others. For example, if you run a clinic, you may want to buy an X-Ray machine and lease high-end imaging technology like an MRI. High end equipment is changing every year. When better imaging is necessary for your patients, you can trade up to the latest equipment without the prohibitive cost of ownership.
Usually, having a mix of loans and leases can enable you to make the right decisions for your business. It also allows you to upgrade specific elements without a cash consuming down payment.
Contact Us Today
Regardless of your decision, the best way to secure equipment financing is by working with a commercial loan broker. Brokers can connect you with a variety of lenders to find the solution that fits your budget and needs. Contact us today to see how we can help you get the best equipment for your business.