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A Brief Guide to Equipment Financing and Leasing for Small Businesses

Business Loans
equipment loan

When it comes to financing a small business, many newcomers would assume that office furniture or even commercial kitchen appliances would fall under a completely different category than a large piece of factory machinery or a delivery vehicle. However, in terms of business financing, any tangible asset owned or leased by a business (other than property) is simply defined as “equipment”.

That means when a small business requires funding for any kind of “asset”, they usually turn to one of the following:

How Equipment Leasing Works:

In broad terms, when a business leases equipment, the finance companies are the ones making the purchase. Once that purchase is made, the equipment is “rented out” to the leaseholder or “borrower”, usually for a set period of time, with payments being taken by the month.

Interest rates for equipment leases are usually fixed, so a business will pay the same amount each month for the length of the contract.

The amount of interest applied varies enormously, depending on factors such as credit rating, cash-flow and industry type. In general, though, those rates could be anywhere between low single percentages, right up to 30% for companies that the lenders view as risky.

Once the lease contract expires, the equipment either goes back to the lender, where it’s usually sold on the commercial market or given the first refusal to the borrower that took out the lease, often for a very reasonable sum that reflects its used value.

So what are the advantages of an equipment lease?

Mainly, it suits businesses that use equipment that regularly become obsolete, or suffers a high turnover due to wear and tear. Any business that regularly needs to update or change their equipment inventory will typically lease, rather than buy. Leasing also provides tax benefits such as writing off total monthly payments. In 2017 the Trump administration made significant changes to the U.S. tax code via The Tax Cut and Jobs Act which greatly impacts taxes on equipment financing, please consult your CPA to see which tax strategy is best suited for you.

A Few More Details:

Some business owners prefer to take out equipment leases specifically because they aren’t classified as loans in credit reports. That means that lines of credit aren’t tied up in the purchase of assets, giving a little more room to manoeuvre during periods of early growth, for example.

With all that being said, the monthly payments required by an equipment lease absolutely do show up in credit reports and will reflect badly on businesses that fall behind.

When it comes to the actual mechanics of the lease itself, there are multiple different types, with a range of terms and interest rates depending on the sector or the type of instruments involved. Some leasing companies are extremely niche, others offer leasing for a broader range of instruments, and contract lengths vary from one year all the way up to ten.

Securing an Equipment Lease

Securing an equipment lease depends largely on cash flow, credit rating and business profile. If your company checks all the right boxes, you could be approved in minutes, much like applying for an online loan.

Equipment Loans Can Provide a Good Alternative to Leasing

Before jumping in and applying, it’s important to spend time doing a little business forecasting. Sometimes an equipment loan can make more sense (and be cheaper overall) than a lease.

It’s also important to consider equipment wear and tear and depreciation. If for example, your company uses equipment that suffers a high degree of wear-and-tear or machinery that depreciates rapidly (or suffers fast obsolescence), an equipment lease makes far more sense than an equipment loan.

Are you ready to Apply online and get pre-approved for your equipment financing? We invite you to call us today and speak with an industrial equipment lease specialist that can offer you a no-obligation approval and run payment scenarios for you subject to credit approval at 888.201.2860.

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