Need to buy equipment for your business? You have options! However, there are some important factors you’ll want to review before signing on the dotted line.
Your final decision will depend on your business budget, the lifespan of the item and its value, credit score, business history, and a few other factors. To find the best financing options for your business, let’s compare the three main options.
Financing a piece of equipment means you can take possession of it as soon as the transaction is finalized. You own the equipment you purchased, along with the promise to repay the amount borrowed, including interest, over a specific amount of time.
You can typically get the most favorable loan terms for equipment financing from traditional banks and credit unions, although they have stricter credit requirements. You may also want to look into online banks that cater to small businesses and have less restrictive credit standards compared to traditional banks.
The primary thing to consider with equipment financing is the term of the loan. How long do you think your business will use this piece of equipment? Make sure the term of the loan doesn’t exceed the lifespan of the equipment.
Another option if you’re seeking to acquire equipment for your business is leasing. You can lease a piece of equipment for a specific period of time with the intention of returning it when it’s no longer in use. Often, you can negotiate to purchase the item once the lease contract has ended.
Depending on the price of the lease and structure of the leasing agreement, it may be more cost-effective to lease equipment rather than buying it outright, especially if you only plan to use a piece of equipment for a short period of time.
A lease is not considered a loan, so you don’t pay interest in the traditional sense.
However, the structure of the lease may include operating costs and an effective interest rate to make up for this. Just beware that making lease payments and then choosing to purchase the item once the contract has ended will likely cost more in the long run.
Are you looking for equipment for a specific project? Renting may be a good option for your business. If you’re using a piece of equipment for a short-term project, or if the item is no longer being produced, renting it can be a smart choice.
When equipment is rented, it’s not considered a fixed asset like a new piece of equipment that's financed. So, the rental cost is an operating expense. You can also return or exchange it quickly and easily—often with minimal cost.
The Bottom Line on Acquiring Equipment
Knowing when to invest in the right equipment isn’t always a cut-and-dry answer.
However, by understanding the options above, you’ll be able to make the best decision when acquiring equipment for your business. It all comes down to the type of equipment you need, the length of time you need it, and whether you want to keep it.