05 May Equipment Financing: Loan or Lease?
Almost every business startup, or expansion, requires that you buy equipment. The quantity and type needed runs the gamut, but the one thing that is common, to most, is the need for equipment financing to help make that purchase possible.
Equipment Financing Basics
Where to look: Banks, credit unions, the Small Business Administration and online funding brokers all offer business equipment financing and are all sources you should initially consider. That gives you options, not to mention bargaining power, so be sure to explore the various types of lenders out there and compare their interest rates and terms.
Why you should consider an equipment loan: Simply put, a loan can provide the capital to buy the equipment you need. When looking to buy, an equipment loan could be just the ticket and it just may be a smart financial move too – (see “Loan or Lease” below). Once funded the money can be used to purchase any type of business equipment you need.
How it works: An equipment loan basically works just like a car or boat loan. This type of loan is a secured loan, so that means that the equipment you buy will become the collateral that secures the loan.
The terms: Equipment loans are, almost always, fixed rate loans with interest rates that range from 8% to 30% depending upon the amount of money you are borrowing and the length of the loan in years or months. Payments are usually fixed, so your payments remain the same every month.
Loan or Lease?
Loan: With an equipment loan, you own the equipment after the loan is paid off, giving your company more equity and more borrowing power. Also, buying outright, versus leasing, is less costly overall if you end up using the equipment for a long time.
Lease: Leasing is the preferable option if you plan to use the equipment for 36 months or less. Leasing is also 100% tax deductible, which is a consideration you should talk over with your tax accountant.
Lease to buy: Many lenders provide lease-to-buy plans as an additional equipment financing option. Like leasing a car, this option typically has a smaller monthly payment with special terms and incentives to make it easy and desirable for you to buy the equipment at the end of the lease.
Be in the driver’s seat. Interview your potential lenders. Let them know exactly what equipment you need and why. And don’t be shy about telling them that you’re shopping around.