Equipment Financing verses Leasing
What You Need to Know
When your business needs equipment but you don’t have the cash to buy it outright, you have two options: leasing or financing.
Quick Overview: 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 a more particle choice. 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.
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.
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—heavy machinery, for example–you may be more interested in seeking equipment financing so you can buy the item outright.
Equipment loans can be easier 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.
Benefits of Equipment Financing
- 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 can be a little less concerned about your credit score and financial history–especially since the equipment you’re purchasing will be used to secure your loan.
- Tax Incentives
There are advantages to both leases and equipment loans. Tax incentives vary year to year. Your accountant is the best one to answer tax questions. Plus, all long and short term business goals come into play.
Benefits of Equipment Leasing
- 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.
- Tax Incentives
Equipment leasing provides the same tax incentives as equipment financing.