Equipment Financing Vs. Leasing
Does your business require heavy machinery, computers, office furniture, or kitchen appliances to keep it running and operational? If so, chances are that you understand the capital requirements needed to acquire this type of equipment could drain your cash reserves. Luckily, small business owners can acquire this expensive machinery through Equipment Financing or Leasing. In this article, we’ll explore different equipment financing options, including the advantages and disadvantages of each type.
Leasing equipment and buying it only differs in terms of ownership.
When you lease a piece of equipment or heavy machinery, you are paying a monthly fee for an essential tool that you need to operate your business. At the end of the lease contract, you can renew the lease or purchase the equipment. Equipment financing, on the other hand, is a self-collateralized loan that allows you to own the equipment.
Keep reading to find out what is the best option for your particular business’s needs.
Luckily there are more options available today than ever before to finance the acquisition of heavy equipment and machinery. If you conclude that buying equipment is the most feasible financing option for your operations, you have several potential sources for funding. Two solutions include taking out a traditional bank loan or working with an equipment leasing broker who offers full equipment financing.
Bank Loan – Taking out a bank loan is feasible for people or companies with good credit or access to an expandable line of credit. For companies and individuals with a poor credit score or limited hard assets, qualifying for a traditional loan could prove more challenging.
Advantages Of Taking Out A Bank Loan:
- Competitive Market Rates
Disadvantages Of Getting A Bank Loan:
- Extensive paperwork required
- Larger down payment
- High Probability of declined application
- Slow processing times
- May require secured collateral
- Tax liabilities
Now, let’s take a look at financing equipment through an alternative lender.
Equipment financing, or also known as Equipment loans, is when you borrow from a lender to own the equipment and pay it over time. Purchasing equipment makes perfect sense for assets that will retain their value over a long time (+10 years), much like tractors and furniture. Depending on how you structure the loan, you can borrow all or most of the value of the equipment. And the best part is that these equipment loans are self-secured. Meaning that the equipment itself will act as collateral. You won’t have to risk any of your business or personal assets.
Equipment Financing Advantages:
- No balloon payment
- Equipment ownership
- Tax benefits up to $500,000
- Easier qualification
- Limited paperwork
- Flexible down payment
Disadvantages of equipment loans:
- Higher payments than leasing
- Lower tax savings than leasing
Leasing heavy equipment works the same way as leasing a car. Depending on the repayment terms of the lease, you agree to pay a set amount of money for a specific time, typically 36, 48, or 72 months. At the end of the contract, you get to decide whether you want to walk away from the equipment or buy it outright.
One thing to keep in mind is a standard equipment lease includes an FMV (Fair Market Value) residual clause. This clause requires additional payments at the end of the contract, should you decide to keep the equipment.
Further, equipment leasing offers attractive tax benefits. In some cases, you can deduct 100% of your lease payments from your taxes. Check with your trusted tax professional and accountant for more information on this topic.
Equipment Lease Advantages
- Quick funding
- Flexible down payments
- Easier qualification than bank loans
- Tax benefits
- Lower payments than loans
Equipment Lease Disadvantages
- Residual Clause – If you want to keep the equipment after the lease ends, you need to make another payment.
Equipment Loans and leases go by many names, even though they are necessarily the same thing. These names include EFA’s (Equipment Finance Agreement,) a Capital Lease, a Finance Lease, or a $1.00 Buyout. In a $1.00 Buyout, you make a payment for $1 after making the final payment on the loan. After this payment, you own the equipment outright. To qualify, the piece of equipment must be listed as a depreciating asset. What makes Equipment loans favorable to borrowers is a tax break found in Section 179 of the tax code. Beginning In 2016, borrowers are eligible to immediately deduct the full cost of the equipment up to $500,000 from their tax bill.
Which is the best option for financing equipment?
Every situation is unique, and many factors must get taken into consideration. Depending on your business plans and objectives, a lease might make more sense than a loan, due to the tax benefits this product offers.
If you were to buy a piece of machinery for $75,000 and finance it for four years with a loan, the write-off for depreciation would always be equal to $75,000.
When you take out an equipment lease, all payments can get written off as an operating expense – a significant tax ramification. For companies that require the use of heavy machinery, this adds up quickly at the end of the tax year. It’s almost like a cash advance of sorts.
Further, it offers a sensible solution to companies and individuals with damaged credit or limited access to capital or collateral.
Instead of having to involve yourself in a time-consuming and frustrating loan process at the local bank, work with online lending and financing companies who specialize in this type of transaction. They stick to their business model and work hard to finance applicants.
Deciding What Financing Is Best For You
If you’re thinking about buying equipment for your business, research all the options available to you before making a financial commitment. It can make a difference in your bottom line.