Equipment Leasing vs. Financing: Which Is Better for You?
Equipment can take a huge chunk of capital. It can be an asset to your business. Most people just think of heavy machinery as equipment, but any tool you use in your trade falls under the umbrella of equipment. Your office furniture, IT software and vehicles are all types of equipment. Deciding whether to purchase equipment or to lease it can be tough.
What Is Equipment Financing?
Most small business owners don’t have the funds to outright purchase equipment. With a loan, the lender lends you the money to purchase the equipment. You pay back the loan with interest over time. At the end of the loan, you fully own your equipment.
How Is Equipment Leasing Different?
Leasing equipment is more like a rental agreement. The lender owns the equipment, then rents it to you for a monthly fee. At the end of the lease, you can usually choose to purchase the equipment at a fair market value, which is usually outlined in the terms of the lease. You may also give the equipment back to the lender. In very simple terms, equipment financing is like buying a house while equipment leasing is like renting an apartment. There are times in a person’s life when it makes sense to rent and other times when it makes sense to buy. Here are some thing to consider:
- How long before the equipment is outdated? – Leasing agreements usually last between two and seven years. Will the value of the equipment last? Will the equipment become obsolete quickly?
- How much capital do you want to invest? With an equipment lease, you should have lower startup costs over financing a piece of equipment. Typically, there won’t be any money down, nor will you have to take on more debt or secure the lease with collateral.
- What about your credit? Many businesses with challenged credit can be approved for a lease that they might not qualify for a loan.
- How long will you need the equipment? At the end of the lease, you can choose to purchase the equipment, continue to lease it or trade it for an updated piece of equipment. This gives you flexibility you can’t get with an equipment loan.
Equipment leasing has many advantages. However, you don’t hold the title to your equipment. You could pay more for the lease than you would if you purchased the equipment. You have to weigh the options and see how it fits into your business plans and goals. If you have the money for a down payment and the equipment will last, financing can make more sense. Leasing may make more sense when you need equipment for a short time or lack funds to purchase.