When running a business, there are times when you have to decide on acquiring new machinery to help the company in meeting its goals more efficiently. The question arises if you are better off financing your equipment or leasing it. Both scenarios have their own sets of advantages and disadvantages.
How does financing your equipment work, and what are its pros and cons? This article is here to help you understand it all a little bit better.
Financing your equipment means you are acquiring its ownership. The investment in the machine is then spread out over several years of its useful life. By financing your equipment, you own it until you decide to sell it further or scrap it.
On the other hand, when leasing equipment, the person or business who owns the machine is offering you to use it in exchange for payment. Within this, there are two types of leasing you need to be aware of.
Capital Lease and Operating Lease
Operating leases are more suitable for businesses that are planning on using the equipment for a short period or intend to replace it after it serves its purpose.
Examples of equipment companies lease in this scenario are computers, printers, and other such technological equipment. Operating leases are an expense for the lessees.
Businesses more frequently opt for Capital Leases. It is the preferred scenario if your business plans on acquiring ownership at the end of the lease. Imagine there is a piece of machinery that the business has decided to lease.
Usually, the usage of machines is for an extended period. It is natural for the companies to go with a capital lease option in this example. That way, they can purchase it at the end of the lease and even claim depreciation on it.
Once you have decided which means of acquisition is best, it is time to shed light on other things that need to be considered, such as cost of purchasing the equipment (or leasing it). There are also taxes to be aware of including, maintenance costs, labor training costs, delivery charges, etc.
Now that you know, “How equipment financing works?“, following are six essential tips to keep in mind when to finance or lease business equipment.
1 – Firstly, you need to be able to differentiate between two types of leases. Fair market value and a $1 purchase option lease.
- a) A $1 purchase option lease means that at the end of the lease term, you have the opportunity to purchase the equipment that you leased for $1.
- b) a fair market value lease means that you will be paying for the equipment in monthly installments.
2 – Be aware of the market and not jump the gun on what you believe to be the best deal. It is essential to take time and do some research on local businesses, financiers, and banks.
Compare the rates offered, coupled with the terms of an agreement on their leases, interest rates, and make sure to search on all the options available to you before making a decision.
3 – In leasing equipment, you must provide a detailed projection of how the material is used, how you generated revenue, and how much cost you have reduced in the process.
The more clearly you describe the utilization of the equipment, the more inclined the lender will be to lease you the equipment.
4 – It is best to not spread yourself too thin in the market by sending in multiple leasing applications to different businesses.
If a lender starts to see rejections on your portfolio and begins to inquire as to why other companies didn’t deem you fit enough to lend you the equipment, this will reduce your chances. They will see you as a lesser viable option because other businesses don’t want to do business with you.
5 – It is essential to make sure that your company has a positive image to it. To ensure that, it’s critical to managing your business’s credit report.
There are a lot of things that a future financier would want to look at to ensure that your business is a viable candidate that will fulfill all the monetary requirements and not cause the owners to lose money.
6 – Arranging your equipment acquisitions under one lease will lead to cost-effective and organized payments. It could also open up discounted or better deals for your business