For most businesses, equipment financing is a constant challenge. Why? They lack the cash to buy the equipment. The good news is, they have another option – leasing equipment.
As a business, you can choose to finance the equipment using your own capital. Or you can opt to lease from a trusted supplier. As such, you can get specialized equipment but in different ways.
Read – Organizing Finances for Your Small Business: 7 Top Tips and Tricks
A vast majority of companies offer competitive rates when it comes to leasing. This means you don’t have to break the bank. To make a smart decision, you must first understand leasing or financing.
Read on and learn the difference between leasing and financing.
Equipment Loan
As said earlier, equipment financing is where a business seeks a loan from a lender to buy equipment. Depending on what you want to buy, the lender will help you to finance.
In return, you will pay off the principal sum and the interest over a specified period of time. After you have repaid the loan, the equipment becomes your property.
Leasing Equipment
Unlike equipment loan, leasing equipment entails renting the equipment from a vendor. Simply put, it’s like renting an apartment.
What you need to know is that equipment leasing requires no down payment and collateral. As such, your business will be held responsible for the monthly payments. With equipment leasing, you have the option of terminating or renewing the lease.
Different Types of Leases
As a business, you can buy equipment like bulldozers, backhoes, and commercial mowers. There are two types of equipment leases that can help you achieve your goal. They are:
- Operating Leases
- Capital Leases
Operating Leases
Also referred to as fair market value lease, a business must pay off the equipment with monthly payments. This allows the business owner to own the equipment after the lease term has ended.
Capital Lease
Unlike operating leases, a capital lease is structured like a loan. As such, the monthly payments are higher. Also, the lease does not appear on your balance sheet.
What you need to know is that the business can buy the equipment for 10% of the buying price at the end of the lease.
Learn more about the tax benefits of equipment financing and leasing.
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Leasing or Financing
When you buy equipment with a loan, you get to own the equipment. To repay the loan, you have to make monthly payments to the lender. That means paying back the principal sum and interest.
Let’s take a look at the differences between leasing and financing.
Collateral and Downpayment
Equipment loans are self-secured. As such, no collateral needed. With an equipment loan, some lenders will offer 80% finance. This means you have to finance the rest.
In leasing, you don’t have to put any down payment or collateral. That means, your money will go towards other business expenses.
Cost
Like any other loan, you are required to pay off the principal sum and interest. What you need to know is that financing can be as low as 8%. In some cases, it might go higher.
With leasing, the lender may sneak in hefty interests in the flat monthly payments.
Equipment Upgrade
Technology changes rapidly. If you finance your purchase with a loan, you may end up being stuck with outdated equipment. But with leasing, that is not the case.
All you have to do is lease the equipment and at the end of the lease term, you can upgrade.
Leasing or Financing – Which Is the Best Option for Your Business?
When it comes to leasing equipment or financing, take into consideration the equipment you want to buy. You want to make sure that technology won’t render the equipment obsolete before it adds value to your business. Also, don’t forget you have the option of consulting your accounting experts.
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