Loan or lease? Find out which could be a better value for your business.
No matter what type of business you’re running, you’ll likely need a piece of equipment along the way. Instead of buying equipment as a single expense, many companies choose to make smaller payments on equipment over time. This means either gradually taking ownership of a piece of equipment through a loan or using the equipment for a limited time through a lease agreement. If you don’t have the revenue or the need to purchase expensive equipment outright, either of these methods could boost your business’s efficiency and cash flow.
Which you choose depends on your business’s needs. By weighing the pros and cons of each choice, you can come to a decision that may ultimately benefit your business.
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How do equipment loans and equipment leases compare?
Both equipment loans and leases are ways for businesses to acquire equipment that they might not otherwise have the capital for. However, an equipment loan is money for your business to buy the equipment you need, whereas an equipment lease is a rental agreement that allows your business to use the equipment for a specified period of time. These differences can have a big impact on how the equipment is used and maintained, so exploring your options both ways is a crucial step in determining which is right for your business.
| Loan | Lease | |
|---|---|---|
| Convenience | A loan relies on a lender’s willingness to provide funding, with negotiations necessary to establish rates, deposits and secured assets. | With no need to bother the banks, leases can be more convenient than a loan. If you know what you want and where to find it, you may be able to reach an agreement quickly. |
| Control | During the process of buying the equipment, you have control over how and where the equipment is used. | The company providing the lease keeps ownership of the equipment. This could result in restrictions on its use. |
| Flexibility | Should you discover that you no longer need the equipment, you will still need to make repayments until you fully pay off the loan. | In most cases, you can choose whether to buy the equipment at the end of the lease period, after the principal of the loan is fully paid. |
Equipment financing loans
Like other business loans, equipment loans are financed by banks and lenders. This means that potential lenders will scrutinize both your personal business credit report before extending an offer. Because the lender wants to trust that you’ll meet your repayments, your business’s revenue and cash flow will also be evaluated.
Costs will vary based on the type of equipment you’re purchasing, your business and your interest rate. You should budget regular repayments and have at least 20% of the equipment’s value available to use as a down payment.
Features of an equipment financing loan
- Fully purchase equipment. When you commit to an equipment loan, you’re buying the equipment outright. You can use it how you choose provided you keep making timely repayments towards your loan.
- Lower APR. Your equipment will generally be used to secure your loan. This means your lender may offer you a lower APR than you would receive on an unsecured business loan.
- Regular installments. Repayments are typically charged monthly, quarterly or annually at an agreed interest rate.
- Requires down payment. Though terms vary by lender, you may be required to provide up to 20% of the amount you’re requesting.
Business lenders to consider for equipment loans
Equipment financing leases
Rather than deal with a bank or lending service, you can sometimes organize a lease directly with the equipment provider. Leases may not rely heavily on your credit report or require secured assets. Another plus is that payments are typically tax-deductible.
When you lease a piece of equipment, you likely won’t have to put any money down or secure the lease with collateral. This cuts your upfront costs. Along with low monthly payments, equipment leasing is generally the less expensive option if you plan on upgrading your equipment at the end of your lease contract.
Features of an equipment financing lease
- Simple application. Since you’ll only be renting the equipment, you won’t have to fill out the same long application as you would with an equipment loan.
- No deposit needed. Although it can vary by lender, leases tend not to require a deposit. Instead, you’ll just pay a minimal upfront cost.
- Predictable payments. You’ll make fixed monthly payments on your lease.
- Flexible lease terms. At the end of the lease term, you may have the option to renew or terminate the lease or buy the equipment outright at its fair market value — just make sure the option is written into your contract.
Which financing option offers better value?
If you plan to use the equipment for a long time and have access to a consistent cash flow, a loan could be more convenient for your business. Leasing can be better suited to companies with lower revenue and those seeking equipment that comes with a shorter lifespan.
Short-term leases allow for expensive equipment to be upgraded every few years, with some agreements requiring that the provider update products regularly within the lease period.