From vehicles to large machinery, computers to medical devices, all businesses require at least some equipment to operate successfully. Equipment is expensive, often taking a large chunk of a company’s budget, but keeping it up to date and well-maintained is a necessity. Equipment financing allows business owners to either lease what they need or take out a loan to pay for it outright. This way, a company has what it needs, when it needs it, but without a huge one-time payment. The terms of the contract and interest rates depend on which type of equipment a business needs. Those considering leasing equipment should keep in mind that lenders prefer financing high-value, daily-use equipment, such as vehicles and technologically advanced devices.
The Difference Between a Lease and a Loan
Although the idea is the same, there are slight differences between equipment loans and leases. Loans work like most other ones in that the applicant borrows a large sum of money, buys what the company needs, and then repays the money along with interest. However, unlike a traditional bank loan, an equipment lender can restrict how a borrower spends the money. The lender enforces this by paying the equipment manufacturer directly for the inventory.
Leasing equipment is just entering into a rental agreement. A business owners pays the lender to use equipment for a specified amount of time. The lender owns it. At the end of the lease term, the business owner typically can choose to end the lease by returning the equipment, or, more commonly, either choose to keep renting it or ask about the buyout options. Regardless of which equipment financing process a borrower uses, the equipment acts as collateral and will be confiscated in the event of non-payment.
Benefits of Equipment Financing
Equipment financing is beneficial for several reasons. The flexible options are an excellent choice for up-and-coming businesses since the owner doesn’t need to put collateral on the line, and the flexibility of financing means a quick application process and the ability to upgrade equipment as the technology advances. Financing might even provide a business owner with tax advantages in the form of tax-deductible payments. Finally, financing allows business owners to pay little to no upfront cost, which improves cash flow in the immediate future.
Business owners who choose to finance equipment should do so with education in mind. This means comparing several lenders to determine which one offers the best rates and has the best reputation among borrowers. Choosing the right lender helps to ensure a smooth and successful borrowing process.