Your equipment needs are unique to your business. Using some form of equipment financing may be the most cost-effective way to acquire that equipment, especially if you lack the funds for the purchase.
Equipment financing offers a loan or lease as a way for you to purchase or borrow a physical asset: the equipment. Because the equipment is used as collateral, a lender can repossess it if you default on the contract. Lenders view equipment financing as a lower risk than traditional financing.
If you decide that you want to take advantage of equipment financing, you will need to consider whether a lease or loan is best for your situation. Understanding the advantages and disadvantages of each option should help guide you toward that decision.
Equipment Lease
- If your business requires routine equipment updates due to changing technology, leasing may work for you. You may be able to negotiate the terms of the lease to allow periodic equipment upgrades.
- A large down payment (20%) is not needed to acquire the equipment.
- The lessor owns the equipment and is therefore responsible for its delivery, set-up and maintenance.
- Your lease may be tax-deductible and will not be recorded as a lien against your business.
- A lease may end up costing you more money than a loan because of its higher interest rate.
- Some equipment may wear out or no longer be useful before the lease terms are up, leaving you paying for something obsolete.
Equipment Loan
- It’s best to take out a loan if the equipment you wish to purchase will be in use for a minimum of three years or will still be relevant to your business when the loan is paid off.
- Loans are a good option if you don’t have the cash to pay for the equipment in full but do have the 10-20% down payment needed for the loan.
- While the equipment may end up costing more than the original purchase price due to the added interest, you won’t have that large initial expenditure.
- You own the equipment upon loan payoff.
As with other forms of conservative financing, you will need to demonstrate upon application that you have a credit score of 600+ and the ability to make the scheduled payments. Before signing an equipment lease or loan agreement, make sure to do your due diligence to ensure that the terms suit your needs.
