Equipment Financing vs. Leasing: Why to Finance the Equipment for your Business
Equipment Financing vs. Leasing
It goes without saying that having the necessary equipment is vital to the success of your business. Equipment financing doesn’t necessarily involve buying your equipment outright – you can opt to lease it instead. The following is a guide to choosing the best method of equipment financing for your business.
• Bank Loan: You need sufficient cash for a down payment, good credit, and good collateral. Difficult to obtain for a start-up or small business.
• Financing Company Loan: Perfect credit unnecessary, but most lenders require at least one year in business.
• Term Loan: Like a mortgage or car loan – repaid over a set period of time. Suitable for established businesses.
• Small Business Administration (SBA) Certified Development Company (CDC) 504 Program: For businesses with a net worth under $15 million and after-tax revenues of under $5 million for the prior two years.
• Small Business Line of Credit: Similar to a personal or home equity line of credit. Suitable for an established business with a solid track record and an excellent credit score.
• Business Credit Card: A good option for business owners who would like to earn reward points for small equipment purchases.
Equipment Leasing Explained
Equipment leasing means you pay the owner of the equipment a monthly fee to rent it. It’s similar to leasing retail or office space. When the lease term ends, you have the option to renew your lease or, in some cases, buy the equipment outright. Its one disadvantage is that you could end up paying more in lease payments than it would have cost you to purchase the equipment up front. However, this disadvantage is offset by equipment leasing’s many advantages, including:
• No down payment
• Usually no need to supply collateral.
• Easier to obtain than equipment financing for small businesses.
• Enables you to have the most up-to-date equipment.