Every small business has financing needs. Depending on your situation and your business needs, there may be a necessity for you to consider multiple financing options in order to be sure all of your expenses are fully covered.Regardless, one of the biggest areas a small business spends a great deal of money on is equipment. Maintaining the best tools to do the job means purchasing the newest equipment on the market. If your competition has it, you need it, too.But how can your small business afford to always have the equipment you need? One solution that many small businesses turn to is equipment financing.In this article, we are going to cover the basics regarding equipment financing, including the different equipment financing options, and the benefits to your small business that equipment financing can bring.
Equipment Financing: The Basics
Equipment financing refers to borrowing from a financial institution to cover your equipment costs. There are two types of financing options available from most lenders, equipment loans and equipment leases. The differences between the two will be discussed in the next section.In today’s modern world there are many potential sources for an equipment financing plan. From traditional bank options to online lenders, the different options available means you can explore the alternatives and find a lender that works best for you.One important thing to consider when thinking about equipment financing is the expected duration of time you will need the equipment. When setting up a financing plan for your small business, you want to match the length of time you expect to use that equipment. Make sure that the terms cover the time you will use the equipment, but you also don’t want to keep paying for the equipment once your need for it has ended.
Equipment Financing Options
Equipment financing refers to two financing products that lenders offer: equipment loans and equipment leases. Both are appropriate for different small business owners. When considering equipment financing, it is important to understand each.Equipment loans are lump sums of money that a small business borrows to purchase equipment. The equipment financing company pays the total cost of the equipment, and your small business owns it. Then you make payments based on the terms of the loan until the loan is paid off.An equipment lease is more like a rental agreement. The equipment company owns the title of the equipment while you use it. You either pay your monthly fee directly to the equipment company, or some have third-party financial institutions to handle payments.At the end of an equipment lease, you have three options to choose from:
- You can extend the lease and keep making payments to use the equipment;
- You can end the lease, return the equipment, and stop making payments;
- Or you can purchase the equipment outright from the lender.
Equipment leases usually have a $1 buy out option. The $1 buy out means that at the end of the lease terms, the lender will sell the equipment title to the borrower for $1.
Benefits of Equipment Financing for Your Small Business
The biggest benefit of equipment financing is that it saves your working capital for other expenses. Every small business needs a sufficient inflow of cash to operate, so it doesn't make sense to tie up a huge chunk of working capital on a certain piece of equipment. By financing your equipment with an equipment lease or equipment loan, you'll have enough cash to purchase or lease equipment without straining your capital. You can free up the cash on hand for payroll and other day-to-day costs.Another obvious benefit of equipment financing is that you can always have top-of-the-line equipment to operate your small business. Instead of paying the full cost upfront, you can get a new piece of equipment that will increase your efficiency and output and defer paying for until a later date.There are also several tax benefits that come with equipment financing. Instead of paying for your equipment outright, you can use equipment financing and make smaller, monthly payments. These monthly payments are tax-deductible because they are business operating expenses. Talk to your tax professional about the benefits of equipment financing.Equipment financing gives your business flexibility. You need top-of-the-line equipment in order for your small business to operate and produce the way you desire and need it to. By setting up an equipment financing plan, you can save your working capital and have the caliber of tools you need to do just that.