Everything you need to know about Equipment Leasing vs Equipment Financing

If you have a specialized business that requires equipment such as a construction company or restaurant, investing in ultra-modern state-of-the-art equipment is a sure-shot way to get an edge over your competitors. However, investing in this machinery means a constant cash outflow for maintenance. This doesn’t mean you need to fall behind your competitors. There are still other ways of having access to modern machinery.

Two options to consider are equipment financing & leasing. But which one is best suited for your company? Well, that depends on a lot of factors like the type you need to have, how frequently you are going to use it, resale value, the maintenance cost, and so on. As you can see, these are very business-specific considerations to make before you can make up your mind.

Confused? Well, don’t be. We have got you covered! Here are some useful tips to keep in mind that will help you to make an informed decision.

Equipment Financing vs Leasing: Which one is for me?

While both of these are two major ways to get what you need, there is a considerable amount of difference between the two.

Leasing: It is a pretty straightforward method. As the name goes, you borrow the item from a lender for a specific period and pay rent for it. Once the lease period is over, you can either renew the lease or return the item depending on your requirement.

Financing: This means you’ll take out a loan to purchase the required equipment. The lender will usually loan most of, if not the entire cost of the item. You enter an agreement with the financing firm and repay the loan as per the loan repayment agreement.

The Differences Between The Two

The basic difference is in the ownership of the item. When you lease, you pay to rent and use it, but you don’t own it during the lease term. Although you may get an option to buy it at the end of the lease term. On the other hand, you get complete ownership once you repay the loans as per the agreed terms.

Making an informed decision

1. Don’t go for financing if you think the equipment may become obsolete shortly. Leasing is the best way out in such scenarios.
2. If you are concerned about your company’s cash flow, then leasing is a better option for you as it has a low impact on cash flow. Since you don’t need to make a down payment, you can spread out your payments over the entire lease duration. As a benefit, you get to choose to use your cash for other unavoidable overheads.
3. If the cost is relatively low compared to the loan (this could be especially true if you need to use it for a long duration of time or your lender levies an effective interest rate on your monthly payments) then we would suggest you go for financing.
4. Equipment financing also comes in handy when what you are looking for is unavailable and you need to settle for a different one.
5. Financing works well when what you are looking for lasts for a long time and is durable with little or no maintenance. If you are going for a loan, remember the terms will greatly depend on the type of equipment and other associated details.
6. However, there are downsides too for a loan. One of them is certainly the initial down payment especially if you are having cash flow issues. Plus, you may have a risk of owning something obsolete.

As discussed, both equipment financing and equipment leasing has their pros and cons and depends completely on the individual business plan and long-term goals. Hope you will find the above pointers handy to help you make the right decision in the best interest of your business.