What is the advantage of outright equipment purchases?
Tax Benefits - Under IRS Section 179, equipment purchases frequently qualify for a full tax deduction in the year of purchase. Thanks to this financing option, many business owners can deduct the entire asset cost in the year it was purchased.
What is the disadvantage of outright equipment purchases?
High monthly costs - Unlike leasing, buying equipment frequently means larger monthly expenses. A down payment will likely be required for a standard loan, and your interest rate will depend on your personal or business credit score. A higher loan rate will apply if you have poor credit.
Due to higher monthly charges, less operating capital will be available for things like inventory purchases. Generally, firms with lesser yearly sales would want to consider leasing rather than buying outright to save working capital.
Additionally, the pandemic-related supply chain problems and the ongoing disruptions in the American economy point to the need for small business owners to conserve as much working capital as possible.
What is equipment leasing?
For business owners, leasing equipment could be a more affordable financing choice, particularly for large machinery. Since you just pay for the usage of the equipment when you lease it rather than buying it, you typically have smaller monthly payments.
What are the pros of equipment leasing?
- Lower monthly payments - Since you will only pay to utilize the equipment during the lease term, your monthly expenses will normally be cheaper.
- Possibility of Upgrading to Newer Equipment - Leasing allows the business owner to quickly upgrade to newer, more current equipment after the lease for machinery that might become outdated or wear out.
- Low or no initial out-of-pocket expenses - A down payment is normally unnecessary while leasing.
- Option to Purchase - In many circumstances, you will be given a buy-out option towards the conclusion of the lease period. Before you sign your lease, go through this with your service provider.
What are the cons of equipment leasing?
- Fewer Tax Benefits - Unlike buying, leasing provides less (immediate) tax advantage.
- No equity or ownership - You won't accumulate equity in the equipment if you lease it. At the end of the lease term, many leases do, however, provide buy-out options. These specifics are stated in your lease contract by your servicer.
How can you qualify for equipment financing?
Compared to term loans or other forms of traditional financing, equipment loans are typically easier to qualify for. This is so because the equipment being financed sometimes serves as the security for the financing. The equipment will almost always be subject to liens from the lenders, but they may also demand additional security.
Most equipment producers will cooperate with lenders who assist in financing their goods. The manufacturer may, in some situations, offer the finance directly.
Manufacturers of equipment frequently offer very low-cost or interest-free financing for their goods, particularly for older models that could still be lingering in their inventory.
You should find out if the manufacturer offers financing or if old equipment leased out before is available. You might save hundreds of dollars by doing this.
What are the alternatives to equipment financing?
One of the greatest ways to fund the acquisition of larger or more expensive gear is through equipment financing. However, entrepreneurs could consider other sources of funding.
Commercial Line of Credit: Utilizing already open lines of credit is easy and enables your business to make speedy purchases.
SBA Loans: Business owners can use programs the U.S. Small Business Administration provides to buy equipment for their operations. The SBA 7(a) loan is the most well-known program.