Leasing vs Buying Equipment for Your Small Business
by Fundid on Jun 21, 2023 8:00:00 AM
Does your business require specialized, expensive equipment for its operations? While having the equipment is essential to running your business, you may be trying to determine if it makes more sense to lease or buy your equipment. Whether it’s heavy equipment, computers, specialized machinery, or something else, the lease or purchase debate is fairly common.
Deciding whether to purchase or lease equipment is an important factor in growing your business efficiently and maintaining your budget while obtaining the necessary tools to help you achieve success. In this guide, we'll break down the advantages and disadvantages of each option to give you an idea of which purchasing method might work best for you.
What are Business Equipment Loans?
Business equipment loans are when a lender gives you capital to cover the value of the equipment you’re looking to buy. You don’t need to offer any personal guarantee on the loan because the equipment itself is the collateral. It can be seized by the lender if you default on your payments. Depending on the equipment and lender in question, there may also be so-called “soft costs,” which are other fees associated with equipment, including delivery, installation, warranty, etc.
Rather than relying on personal savings or credit cards, equipment loans allow you to borrow money specifically for purchasing or leasing new equipment. This means you can upgrade your machinery or technology without negatively impacting your cash flow. Plus, most have fixed interest rates and manageable repayment terms, so equipment loans are a smart choice for any savvy entrepreneur looking to expand their business and smooth their cash flow.
What Does it Mean to Lease Equipment
Leasing equipment is similar to renting it and can be a great option for small business owners who need access to expensive tools and machinery but don't want to make a big upfront investment. You aren’t buying the equipment outright, but you are making payments to use it for a specific period. Leasing can be beneficial if you have limited capital upfront or need equipment that will likely need to be upgraded in a few years. This is what makes leasing an attractive option - it is flexible, you can terminate the lease early in some cases, and it opens the door to the latest technology without having to purchase new equipment constantly.
However, it's important to weigh the cons as well, such as the potential for higher overall costs and limitations on customization options. More often than not, the regular lease payments add up to be more than the cost of buying the equipment outright. As a small business owner, it's crucial to carefully consider your options and make the decision that best fits your unique needs and goals.
What does it Mean to Buy Equipment
When you buy equipment, you own it. Buying equipment can be a sound investment that increases the value of your business over time. In some cases, you may also get special incentives or tax breaks, like Section 179 and Section 168(k) of the IRS Tax Code, when you buy upfront. Of course, buying equipment also comes with its own set of challenges, such as upfront costs and maintenance responsibilities.
Depending on how you finance it, buying the equipment may require quite a bit more capital upfront. Additionally, unless you have a maintenance or upgrade agreement, you’re stuck with your purchase until you decide to sell it and are responsible for all maintenance to keep it running. If you’re confident that the equipment you’re interested in will be what you need for several years down the line, buying it will cost more upfront, but it can be more economical in the long run.
How do You Know if it is Better to Lease or Buy Business Equipment?
When it comes to making a decision between leasing or buying business equipment, there are many factors to consider before making your final choice. A lease can be an attractive option for some businesses as it allows them to spread out the payments over a set period of time, much like renting an apartment. This can provide valuable flexibility and allow you to regularly upgrade your equipment to keep up with technological advances.
On the other hand, purchasing equipment can offer significant long-term savings and valuable tax benefits. Additionally, ownership provides you with greater control over your equipment and how it is used. To determine which option is better for your business, it's important to weigh the pros and cons of each carefully and explore all available financing options. Consulting with a professional advisor can also provide valuable insights to help you make an informed decision based on your financial needs.
How to Get A Business Equipment Loan
If you’re leaning more toward the buying route but are unsure how you’ll come up with the money to buy the equipment upfront, you might consider a business equipment loan. If you’d rather own your equipment and save money by not leasing, there are ways to get the funding. Read on to learn how you can secure a business equipment loan and start putting the capital to work growing your business.
It can depend on the cost and type of equipment in question, but a business equipment loan often requires very good to excellent credit. Small businesses seeking a business equipment loan should also have outstanding sales and cash flow. Traditional banks may not want to take the chance to lend to a small business, but some online lenders, like Lendio, have more favorable options. With one application, you can compare your options from 75+ different lenders.
The process will be fairly similar when seeking a business equipment loan, whether from a traditional bank or an online lender, but they can vary slightly. Generally, you will need to provide documentation such as personal and business tax returns, financial statements, and a business plan. Additionally, a well-researched business plan that includes your goals, strategies, and market analysis can also increase your chances of approval.
Where can I Get a Business Equipment Loan?
If you're in the process of searching for funding, it's important to know not only what type of loans you may qualify for but also what your credit score looks like. By knowing your credit score, you can better understand your financial situation and eligibility for certain lenders. A credit score essentially acts as a snapshot of your creditworthiness and can greatly affect the interest rates and terms you receive on the loan.
If you're not sure what your credit score is, there are several ways to check it for free. Beyond that, taking steps to improve your credit score before applying for a loan can often result in more favorable loan terms and even better loan offers. So before you start your search for funding, be sure to take a look at your credit score and see how it can help guide your decision-making process.
These are the banks that most are familiar with, the big finance and banking companies such as JP Morgan, Citi, Wells Fargo, and your local credit union. Traditional banks like to see strong sales and cash flow; the stronger they are, the less of a risk your business will be, and the more likely they’ll be willing to lend to you. Each bank may have varying preferences in cash flow, structures, and loan rates.
If you're not familiar with the term, an alternative lender is simply a financial institution that provides loans or other lending services to individuals or businesses outside of traditional banking channels. This type of lender can be a great option for those who may not meet the strict credit requirements of a traditional bank or who may need a more flexible, customized lending solution.
Alternative lenders typically look at a number of different factors beyond just credit scores, such as cash flow, collateral, and business projections, when making lending decisions. Whether you're a small business owner or an individual looking for a personal loan, an alternative lender may be just the solution you need to access the financing you need to achieve your goals.
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Secure a Business Equipment Loan
Equipment loans are essential to scaling a business, and we want to help your business reach its growth potential. Access to capital, especially when purchasing equipment, is one of the biggest obstacles for any business looking to expand.
We understand how vital capital can be in the early stages of growth and want to support others with their business goals. We know how frustrating not having access to capital can be, whether for an equipment loan or to cover employee payroll. Our mission is to help eliminate that obstacle to small businesses the best we can.
If you need funding to grow your business, search the Fundid Capital Marketplace to find a lender who can help your business grow.