What is Equipment Financing?
There are several types of equipment financing programs. This includes equipment leasing and equipment loans. Equipment lease financing happens when you pay a monthly fee to borrow commercial equipment. The lease company owns the equipment and charges you to use it for a set term (i.e. 24 months). After the lease term is complete, you return the equipment, purchase it outright, or upgrade to new equipment. (If your equipment becomes obsolete in a short period of time, you’ll likely need an upgrade).
In the case of equipment loans, you simply borrow money from an equipment lender to purchase the equipment. Equipment lenders require you to pay a monthly fee, plus interest, until the loan is paid off. The equipment loan would have to be paid off within a set term (i.e. 4 years).
Which one is right for me? An Equipment Lease or Equipment Loan?
Determining what type of equipment financing is right for you depends on your specific business equipment needs. If you need business equipment for long term use, at least 5 years (or more), an equipment loan may be right for you. Business and commercial equipment should be bought (outright) when it will not become obsolete quickly. You may save money in the long run. A good example of this is construction equipment. Most construction equipment lasts for a long period of time.
Equipment lease financing is best for businesses that need to purchase business equipment that becomes outdated quickly. For example, computer hardware that may become outdated within 3 years or less may be better off leased. At the end of the lease, most lease financing companies allow you to purchase the equipment for $1.00, at fair market value or 10% of fair market value. This is after you’ve already spent a set term making a monthly payment toward the use of the equipment. You can end up paying even more if you want to purchase the equipment after the lease is up.
Purchasing the equipment for $1.00 (after the lease term is up) can be an excellent option. However, you’ll have high monthly payments during the lease term. Overall, leasing equipment can be more expensive than purchasing, but it makes sense when the equipment becomes obsolete quickly.
One other benefit of equipment leasing is that it is tax deductible. You can write off your monthly payments on your business taxes. This can reduce your overall tax burden. Make sure you thoroughly understand the equipment finance agreement that you sign because it will outline whether you are allowed to purchase the equipment for $1.00, at fair market value or 10% of fair market value at the end of the lease term. It may be wise to consult with an equipment financing expert to help you determine whether an equipment loan or equipment lease is right for your small business.