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Instead of buying equipment as a single expense, many companies opt to make smaller payments on it over time. This means either gradually taking ownership of the equipment through a loan or using the equipment for a limited time through a lease agreement. Which you choose depends on your business’s needs.
What’s the difference between equipment loans vs. leases?
Both equipment loans and leases are ways for businesses to acquire equipment they might not otherwise have the funds for. The biggest difference is that an equipment loan is borrowing money for your business to buy the equipment, while an equipment lease is a rental agreement that allows your business to use the equipment for a predetermined period of time.
This difference 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.
Convenience | A loan relies on a lender’s willingness to provide funding. Applications can take a week or more to process. | Many manufacturers and retailers of business equipment offer lease deals, meaning you can skip the bank. |
Control | You have control over how and where the equipment is used. | The company providing the lease keeps ownership of the equipment, which can result in restrictions on its use. |
Flexibility | If you no longer need the equipment you’ll 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. |
Equipment financing loans
Like other business loans, equipment loans are financed by banks and other lenders. This means potential lenders will likely scrutinize both your personal and business credit reports before extending an offer. Because the lender wants to know that you’ll meet your repayments, your business’s revenue and cash flow will also be checked.
Costs will vary based on the type of equipment you’re purchasing, your industry and your interest rate. To fully prepare, 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 and it becomes a business asset. You can use it how you choose provided you keep making timely loan repayments.
- Lower APR than other loan types. 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.
Drawbacks of an equipment financing loan
- Requires down payment. Though terms vary by lender, you may be required to provide up to 20% of the amount you’re requesting.
- The loan may outlive the equipment’s worth. Equipment that loses value or goes obsolete quickly may leave you repayments while you’re looking to replace it.
- Funds can only be used for the equipment. If you’re looking to finance more than just your new equipment, you’ll need to take out an additional loan.
Business lenders to consider for equipment loans
Start comparing your options and see how much equipment financing your business could qualify for.
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Equipment financing leases
Rather than deal with a bank or lending service, you can sometimes organize a lease directly with the equipment seller. 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 or near the end of your lease contract.
In addition, leases may not rely heavily on your credit report, and payments are typically tax-deductible. But you won’t own your equipment at the end of your term and must either return it or buy it — meaning you’ll likely still have to take out a loan if you want to keep it.
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 or significant down payment. Instead, you’ll just pay a minimal upfront cost.
- Predictable payments. You’ll make fixed monthly payments on your lease.
- Flexible terms. At the end of the lease term, you may have the option to renew or terminate the lease. You can also buy the equipment outright at its fair market value — just make sure the option is written into your contract.
Drawbacks of an equipment financing lease
- Doesn’t count as an asset. You don’t own a leased piece of equipment, which means it doesn’t count towards your business assets. But the monthly payment still counts as a regular liability.
- Use limitations. The lessor may put restrictions on how you can use the equipment you’re leasing. In the case of a vehicle, this may be a mileage limitation.
- Additional costs. If you want to renew your lease and continue using the equipment, you may have to pay a renewal fee. And buying it outright may mean having to take out a loan.
Which equipment 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. Having the equipment on your books will also count towards your assets, which can be a big plus when looking for additional funding down the line.
Leasing can be better suited to companies with lower revenue and those seeking equipment that comes with a shorter lifespan. Short-term leases even allow for expensive equipment to be upgraded every few years, with some agreements requiring that the provider update products regularly within the lease period.
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