The Difference Between Equipment Leasing and Financing
One of the biggest expenses small businesses face is buying equipment. Depending on your industry, this may mean outfitting your office with a secure computer network or purchasing large industrial machinery. Either way, it takes a lot of cash to purchase equipment, so very few companies buy it outright. There are two typical ways businesses acquire the tools they need: equipment financing and equipment leasing. We’ll explain both and look at their advantages.
With equipment financing, you seek funding from a lender to purchase the item or items you need. Just like a car loan or mortgage, you agree to pay back over an agreed-upon period with interest. The amount you can borrow is generally tied to the value of the equipment.
In an equipment leasing arrangement, the lender agrees to essentially rent the equipment to the business. The lender retains ownership, and the company plays a flat monthly fee for the duration of the lease.
While financing typically requires a down payment, the equipment itself is put up as collateral. Since the equipment secures the loan, your credit score will not come under a great deal of scrutiny. Many businesses enjoy financing because they technically own the equipment unless they default on a loan-it’s a similar arrangement to a car loan or mortgage in that way. This means they can list it as an asset and may enjoy tax benefits as well.
Equipment leasing is appealing for several reasons. Because you are basically renting the item or items, no down payment or collateral is required. If you stop paying, the lender simply repossesses the equipment. Many companies appreciate the fact that the leaser is responsible for repairs and maintenance for the length of the lease term, which can be an extraordinary saving for some businesses.
Usually, at the end of the lease term, the company is given the option to purchase the equipment at whatever is considered its fair market value. The leasers are very rarely interested in taking back equipment that has seen many months of depreciation and trying to sell it. In many lease arrangements, the business can start a new lease with an upgraded model, meaning every two to three years, they receive the latest technology, which would be very costly if purchasing or financing.
As you can see, leasing equipment provides several key appealing benefits. For most young startups, it really is the way to go.