When your business is growing, you might need to get some new equipment to help cope with demand and allow you to offer more services to customers. Trying to decide whether to buy or lease the equipment is a classic dilemma for business owners.
Here is a look at the various funding options available. This includes an overview of why and when it is better to buy or lease, plus details of what is involved with both options, and how to make the right choice.
How equipment financing works
In basic terms, equipment financing is designed to provide your business with a way of funding the purchase of the business equipment your need.
You borrow the money and then make regular payments over a period of time until the loan is repaid and you own the equipment outright. The equipment might be used as collateral for the loan allowing the lender to take it back if you default on the payments.
You might also be required to offer a personal guarantee. This means the lender can pursue you personally if the business is unable to pay. Check what you are agreeing to before you sign the finance agreement.
Buy or lease?
If you are interested in a vehicle like the Ram 1500 for example, would it be better to buy it on a finance deal or are there advantages for your business if you lease instead?
Leasing means you are renting the equipment for a period of time. At the end of the lease term, you can choose to give the equipment back or extend the loan for a further period. You might also be offered the chance to buy the item for a fixed sum.
Leasing can be better for cash flow in your business. When you buy equipment you will be required to make a down payment. You might also have to agree to personal guarantees, depending on the strength of your business.
Decide how long you are likely to need the equipment beforehand. It can make sense to lease if you will be upgrading after a few years. This offers you more flexibility than buying equipment as you can hand the item back at the end of the term.
The downside to leasing is that you are, in effect, renting the equipment and could end up paying more than if you had purchase it outright instead.
There are tax incentives for small business that are financing equipment. Check your status to see if you are eligible. You could find that the finance deal is tax-deductible, which could tip the argument in favor of taking this route to getting the equipment you need.
Choosing the right option
If you are trying to decide which option is best, it often pays to focus on each particular piece of equipment and decide how long you are going to need it for.
If you are looking to acquire an item that you are going to be using for a long period of time, it can be better to finance a purchase and own the equipment outright once you have paid for it.
If you need a new PC for example, this sort of item has a notoriously short life and will probably need to be updated within a couple of years. In this scenario, it is often better to lease the item so you can give it back and you haven’t committed large amounts of business capital.
Brooke Robson runs a trucking business and is happiest when she’s behind the wheel rather than stuck in the office! She discusses business tips in her articles along with the auto/trucking industry and technology.