Your small business has found itself in an extremely common predicament. You are in need of a very expensive piece of equipment but cannot afford to pay the full, upfront cost for a brand new model. As an experienced entrepreneur, you are well-aware that there are several ways you could go about obtaining this new piece of equipment as soon as possible without breaking the bank. A popular choice is equipment financing, which is now being offered by an increasing amount of business lenders. But, like any other business-related decision, it’s always wise to do some research before concluding that equipment financing is the most sensible choice for your individual needs.
Equipment financing has pros and cons, which is why it is not always recommended for any business that needs new equipment. And even if you decide on this option, there are still several more actions to take to make sure you get all the benefits you are looking for.
1. Do you even know what equipment financing is?
The term “equipment financing” is both confusing and misleading. It suggests that there is a special kind of financing program with a repayment structure that is only applicable to large equipment purchases. This is not exactly true. For most business lenders, equipment financing merely refers to a traditional small business loan that is used to purchase equipment. The repayment structure is relatively similar to a business term loan, which makes sense considering business term loans are best suited for substantial, long-term investments.
It’s safe to say “equipment financing” is just another word for an “equipment loan.” The term was likely created to simplify the application and approval processes for potential borrowers who are solely looking for new equipment, as opposed to just more working capital in general.
2. How long you will need the equipment?
The alternative to equipment financing is equipment leasing. You would not own the equipment and would have to either renew your lease or return the equipment after a certain period. To find out which option is more affordable, think about how long you will need the equipment for and how much you will use it. If you will need the equipment for more than a few years at the least, equipment financing is more affordable. In some cases, however, equipment financing could also be more affordable for equipment that is only going to be used for a short period of time. Leasing would force you to continue making lease payments long after you have stopped using the equipment.
So, is there any situation in which leasing would be the better choice? Your business lender will probably only suggest leasing if you work in an industry that cyclically implements increasing advanced technology. More advanced versions of such pieces of equipment are released every year or so. You would replace the equipment within a short and stringent time frame, allowing you to work out a cost-effective arrangement with a leasing company.
3. Can you fix the equipment yourself?
When you lease a piece of equipment, the leasing company is responsible for equipment maintenance. Equipment financing requires you to fix the equipment yourself. At first, the former seems much less stressful. But you must remember that leasing companies can’t always tend to your needs right away. They work on their own schedules and can take as long as they like to complete repairs. This makes the decision a little more difficult. Which is more stressful: Learning to fix equipment or relying on another company (with numerous clients who are just as important as you) to do it for you?
If you plan on using the equipment for a long time, it would be wise to familiarize yourself with its mechanics, regardless of who is legally responsible for maintenance. This is another reason why leasing is usually only recommended for businesses that use advanced technology, since it is tough to repair unless you are an expert.
4. Is it tax deductible?
Many borrowers finance or lease equipment in pursuit of tax breaks. You can’t blame because the interest for leasing and financing agreements is usually tax deductible. But you should never assume that this is the case before making any commitments. Before deciding on either option, talk to a tax professional to make sure you will indeed receive tax breaks on this specific piece of equipment when working with this specific business partner.
5. What are your viable options?
Every business lender and leasing company has its own rules. Some may be more accommodating or willing to negotiate when it comes to monthly payments. Some specialize in financing or leasing certain types of equipment, like heavy machinery or computers. Just like the previous section on this list says, never make assumptions about business lenders and leasing companies. Don’t just assume that taking out a lease is going to be easier than a business loan. Don’t just assume that whoever offers the lowest monthly payments is the cheapest option overall. If you spend enough time exploring different business lenders, there’s a good chance you’ll be able to find one that lets you make the most significant payments when your new piece of equipment has effectively stabilized or increased revenue.
So, when you begin your search, forget any preconceived notions you may be harboring about equipment financing. This program is not what it used to be. Plenty of small businesses who were facing a similar dilemma did not have to settle, so neither should you.