When your business needs equipment but you don't have the cash to buy it outright, you have two options: leasing or financing. Either option provides a means to get what you need--whether it be computers, machinery, or vehicles--but which one is better for your business?
How Equipment Leasing Works
When you're leasing a piece of equipment, you're essentially renting it the same way you might rent an apartment. It typically requires no money down and no collateral, so you'll only be held responsible for the flat monthly payments for the duration of your lease agreement.
Once you've reached the end of the initial agreement, you'll have the option to renew or terminate the lease--or to purchase the equipment for its fair market value.
The biggest disadvantage to leasing is that it can be significantly more costly than simply purchasing the equipment outright. But if you're a rapidly expanding business--or if you're in a technology-driven field that has a high equipment turnover--equipment leasing may be a good solution for your business's needs.
How Equipment Financing Works
If you're looking to purchase something that's less likely to need frequent updating--a pizza oven, for example--you may be more interested in seeking equipment financing so you can buy the item outright.
Equipment loans are relatively easy to qualify for, and the amount of money you'll be eligible to borrow is based on the type of equipment you're planning to purchase, and whether it's used or new.
And because the equipment you're purchasing can usually be used to secure the loan, it's unlikely you'll be asked to put up any additional collateral. These loans do, however, come with fixed interest rates between 8% and 30%--so, again, even though getting a loan may be more affordable upfront, remember that it is costing you something in the long run.
Keep in mind that, unlike with equipment leasing, even if what you're buying does become obsolete, the loan won't be affected, meaning that by the end of your payment plan, you could be paying for a piece of equipment that no longer benefits you.
Benefits of Equipment Financing
1. Less Documentation
With a more traditional loan, lenders want to see years of financial history and a decent credit score, among other documentation. With an equipment loan, on the other hand, lenders are less concerned about your credit score and financial history--especially since the equipment you're purchasing will be used to secure your loan.
2. You Don't Have to Find Extra Money
If your business doesn't have the extra cash on hand, taking out a loan is a way of helping you get the equipment you need without having to pay some of the upfront costs of a purchase.
3. Tax Incentives
The maximum annual tax deduction for those financing equipment is currently set at $500,000, which means, financing is often entirely tax deductible for small business owners. You can learn more about that here.
Benefits of Equipment Leasing
1. You Don't Have to Find Extra Money
A lease allows you to rent a piece of equipment that you can't afford to purchase outright. You often won't be required to make any upfront payments, and the monthly rate is typically lower than what you would see attached to a business loan or line of credit.
2. Stay Current With Technology
If you're in a technology-related field, it makes sense that your equipment should be the most cutting-edge... But it doesn't make financial sense to continue replacing it every few years. If you find that you're in constant need of equipment upgrades, leasing may be a better option than buying.
Since you're not obligated to make a purchase at the end of your lease, you have the option to return an obsolete piece of equipment at the end of your contract and open a lease on something newer. In some cases, you may even be able to trade out equipment in the middle of your contract if the equipment you were using becomes old news.
3. Cash Flow Flexibility
Tying up your working capital in order to update or purchase equipment may not be the best idea, especially if you're already tight for cash. Since a lease doesn't typically require a down payment, you'll have more cash on hand to pay bills, make payroll, and purchase inventory.
4. Tax Incentives
Equipment leasing provides the same tax incentives as equipment financing. You can find more details about tax incentives here.
Which Option is Right for You?
When it comes to deciding between a lease or a loan, focus on the particular piece of equipment you're looking to obtain. If you need equipment that has a short shelf life, consider leasing.
If, on the other hand, this is a piece of equipment you plan on keeping for a long time, equipment financing will likely be your easiest and most cost effective bet. Not to mention, it gives your business another asset, which can be super helpful if you ever consider getting another loan or line of credit down the road.