April 3, 2023
Equipment financing - or equipment leasing - is a type of loan whereby a lender purchases equipment and rents it to a business at a flat monthly rate for a set number of months. When the lease ends, the company has the option to buy the equipment, continue leasing, or lease new equipment instead.
It’s a simple way for businesses to acquire equipment without using working capital or business credit lines. However, before you consider financing equipment, there are five crucial things to know…
Is equipment financing worth it for your business, or would you be better off purchasing the items yourself?
Of course, each case is different, but history suggests that equipment financing is the more financially viable option for most businesses. Owning equipment isn’t that necessary, and won’t provide any additional benefits. Instead, leasing tends to be the more affordable option because it frees up your cash flow and lets you access equipment you wouldn’t be able to afford if you bought it outright.
It’s always good to get tax benefits wherever possible, reducing your business tax bill. Because you’re leasing equipment, it counts as an operational expense. Therefore, you can technically deduct the costs of equipment financing from your taxes each year.
This can be done via Section 179 of the internal revenue code. The rules state that business owners can take an immediate expense reduction for any piece of equipment that’s purchased or financed.
Building business credit is extremely important if you ever want to take out business loans. Perhaps you’re planning to expand your company or launch a new product, and you need an influx of cash. Lenders are more likely to approve your loans if you have a solid credit history.
Equipment financing lets you build credit by proving that you’re capable of meeting regular repayments. Remember, it is effectively a type of loan, so you’re showcasing your ability as a trustworthy borrower. In the future, this can help you get bigger loans with better interest rates as lenders trust your business more than before.
As alluded to in the introduction, the end of your equipment financing lease presents three possible options:
There are a few things to keep in mind when you reach this point. Firstly, how much will you purchase the equipment for? This is something you need to pay attention to when taking out the lease. Sometimes, the lender will set a predetermined amount for the equipment - other times, you can buy it for its fair market value. It’s important to know which of these options is available before you agree to buy the equipment.
Secondly, you should think about the pros and cons of leasing more equipment. If you’re happy with what you currently lease, it makes sense to pick the second option and continue leasing. But, if you want updated equipment, it could be better to return what you’re currently leasing and take out a new lease instead.
Regardless, you need to know the different options available when the lease is over. You then need to consider which one makes the most sense for you and your business at the time.
Before financing equipment, it’s important to know how much it is going to cost. The exact figures will vary, but your main concern is the leasing rate. Effectively, this operates in the same way as an interest rate - it’s how the lender makes money from the lease.
Now, leasing rates will vary based on the following:
Knowing this is important as you have some control over your leasing rates. You may discover that it costs a lot of money right now to finance the equipment. But, if you work on your credit rating, you could bring down the leasing rate and make it even more affordable.
Overall, equipment financing is very advantageous for businesses of all sizes across many industries. Here at LendSpark, we can help you get started on your equipment financing journey. Feel free to contact us today if you want to learn more about this topic, or to see how much it could cost to lease equipment for your business.