If you have a specialized business that requires equipment such as a construction company, investing in ultra-modern state-of-the-art equipment is a sure shot way to get an edge over your competitors. However, investing in these 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 is equipment leasing and equipment financing. But which one is best suited for your company? Well, that depends on a lot of factors like the type of equipment you need to have, how frequently you are going to use it, resale value, the maintenance cost of the equipment 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 Leasing vs Equipment Financing: Which one is for me?
While both of these are two major ways to get your equipment, there is a considerable amount of difference between the two.
Equipment leasing: It is a pretty straightforward method. As the name goes, you borrow equipment 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 equipment depending upon your requirement.
Equipment financing: Equipment financing is a loan to purchase the required equipment. The lender will usually loan most if not the entire cost of the equipment. You enter an agreement with the financing firm and repay the loan as per the loan repayment agreement.
Difference between equipment leasing and equipment financing
The basic difference is in the ownership of the equipment. When you lease equipment, you pay to rent and use it, but you don’t own the equipment 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 the complete ownership of the equipment once you repay the loans as per the agreed terms.
Making an informed decision
- Don’t go for equipment financing if you think the equipment may become obsolete shortly. Equipment leasing is the best way out in such scenarios.
- If you are concerned about your company’s cash flow, then equipment 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.
- If the cost of equipment is relatively low compared to the equipment loan (this could be especially true if you need to use the equipment for a long duration of time or your lender levies an effective interest rate in your monthly payments) then we would suggest you to go for equipment financing.
- Equipment financing also comes handy when the equipment you are looking for is unavailable and you need to settle for a different one.
- Equipment financing works well when the equipment you are looking for lasts for a long time and is durable with little or no maintenance. If you are going for equipment loans, remember the loan terms will greatly depend on the type of equipment and other associated details.
- However, there are downsides too for an equipment loan. One of it is certainly the initial down payment especially if you are having cash flow issues. Plus, you may have a risk of owning obsolete equipment.
As discussed, both equipment leasing and equipment financing has its 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 for the best interest of your business.