Equipment Loans vs. Equipment Leases Which One to Choose?

Equipment Loans

For many small business owners, having access to the tools of the trade is key to ensure success. Computers, office furniture, heavy equipment, vehicles, appliances, HVAC units, there are just some of the equipment used by most establishments. However, startup companies and small business owners may find it financially challenging to pay for everything in full using their working capital. Fortunately, you can always apply for equipment financing for business.

There are two types of equipment financing you can choose from– equipment loans and equipment leases. Both options can help you acquire equipment, but the main difference lies in the ownership of the equipment.

To determine which option makes the most sense for your business, it’s important to understand the difference between the two.

Equipment Leasing

Equipment LeasingEquipment leasing is similar to renting an apartment, so you don’t actually own the equipment. Generally, you don’t need collateral or a down payment. You’re only responsible for the monthly payments throughout your lease. Once your lease term ends, you can usually renew or terminate the lease, or purchase the equipment at fair market value.

The major drawback of equipment leasing is that it costs more compared to purchasing the equipment outright. But if your business is at the brink of growth and expansion or your equipment has a high turnover rate, equipment leasing may be the better option for your business.

Here are some of the benefits of equipment leasing:

  • No Need for a Down Payment: Leasing lets you rent the equipment you otherwise can’t afford to purchase upfront. You don’t need to make a down payment, just the fixed monthly rates until the end of the term.
  • Healthy Cash Flow: Tying up a huge amount of working capital on a piece of equipment may not be a great idea. Since you don’t need to make a down payment for equipment leasing, you’ll have enough working capital to pay for operational expenses.
  • Tex Benefits: Not a lot of people know that they can enjoy tax incentives with equipment financing. The maximum tax deduction for equipment financing is $500,000 per year. This means that acquiring used or new equipment is tax-deductible for small business owners.
  • Updated Technology: Whether you’re in the medical or IT industry, the equipment you’re using should be nothing but the best. If you need to upgrade your equipment every few years, leasing may be a better option than purchasing. You can return obsolete equipment at the end of your lease or open another contract. In some cases, you can even trade equipment in the middle of your contract.

Equipment Loans

On the other side of the spectrum, equipment loans give you the funds you need to purchase (and own) a piece of equipment. This works best for businesses that need to purchase equipment that doesn’t need frequent upgrades.

It’s easy to qualify for equipment loans since the equipment you’re looking to purchase secures the loan. The loan amount is based on the type of equipment you’re planning to buy and whether it’s used or new. Depending on the lender you’re working with, fixed interest rates for equipment loans range from 5.25% to 24.99%. Even if getting a loan is more affordable, it will still cost you in the long run. Unlike equipment leasing, you don’t have the option to upgrade or change the equipment purchased. This means that by the end of your loan repayment term, you could be paying for outdated equipment.

Here are some of the benefits of equipment loans:

  • Tax Benefits: Equipment loans have the same tax benefits as equipment leasing.
  • Less Paperwork: Compared to traditional loan options, you don’t have to submit extensive paperwork. Lenders are not as concerned with your credit rating and financial history because the equipment you’re looking to buy serves as collateral for the loan.
  • No Upfront Costs: If you don’t have the working capital to purchase the equipment upfront, applying for a loan lets you acquire the necessary equipment without paying for it outright.

Equipment Lease or Equipment Financing for Business? Which is Right for You?

equipment loan might be a better optionIf you need new equipment for your business, you have the option to choose between equipment loans or lease. The best type of equipment financing depends on what your business needs. There are two factors you want to consider when deciding between a loan and a lease:

  • How much money do you currently have?
  • When will the equipment you’re looking to purchase become outdated?

If you have enough working capital to make a down payment and the equipment you want to buy will last for years, an equipment loan might be a better option. On the other hand, if you don’t have enough capital and the equipment has a high turnover rate, an equipment lease is the way to go. Either way, equipment financing for business is a great way to fund equipment purchases. Find out more about it on SMB Compass.

Article Submitted By Community Writer

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