When your company needs to buy equipment but does not have the cash on hand, there are two options: equipment financing and equipment leasing. Both options will provide you with the equipment, but which is better for your business?
How Equipment Financing Works
When you want to buy a piece of equipment that you will use for a long time and requires less frequent updating, equipment financing is the best option. This allows your company to buy the equipment outright. Equipment financing is relatively simple to qualify for, and the amount you will be able to borrow will be determined by the type of equipment you intend to purchase and whether it is new or used. The equipment you are purchasing can usually be used to secure the loan; additional collateral is unlikely to be required. These loans will have fixed interest rates ranging from 8% to 30%, making them more affordable upfront but costing you more in the long run.
Benefits of Equipment Financing
Benefits of Equipment Leasing
1. You don’t need to find extra money
Leasing equipment allows you to rent equipment that you cannot afford to buy outright. Most of the time, no down payment is required, and the monthly payment is typically lower than that of a business loan or line of credit.
2. Keeping up with Technology
Leasing is a great option if the equipment you want to buy becomes obsolete every couple of years due to the release of a newer make and model. It makes no sense to finance a piece of equipment that will only be useful to your company for a few years. This works exactly like a car lease in that at the end of the lease, you can trade in the equipment for a newer model. There is usually no obligation to buy the equipment at the end of the lease.
3. Doesn’t Hurt Cash Flow
Your company’s cash flow is its lifeblood. If your cash flow is tight, leasing the equipment is a great option because there is usually no upfront payment and you can use your cash on hand to pay bills, payroll, and purchase inventory.
4. Tax Incentives
The same tax benefits apply to equipment leasing as they do to equipment financing.
Which Option is Right For You?
Consider the type of equipment you want to acquire when deciding between a lease and a loan. Leasing is an excellent option for equipment that becomes obsolete every few years or that is updated.
If the equipment, such as a pizza oven, will be used for a long time, consider financing. Another advantage is that you now have an asset that can be used to secure a credit line or a business loan.
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