Business equipment is expensive, and even smaller costs associated with equipment, such as routine maintenance and minor repairs, can add up quickly. Financing is one way to reduce the financial burden of buying new business equipment, but it may not be right for everyone.
Almost any type of business equipment can be financed, and owning the equipment at the end of the loan means you won’t have to deal with lease payments if you don’t want to. However, just like with any loan, financing business equipment means you’ll pay more for the equipment in the long run than you would have if you just purchased the equipment outright. For example. If you run a dental office, you’re going to need dental equipment, but the question is, should you buy it outright or lease it? This article will discuss the pros and cons of financing your business equipment and provide you with a few alternatives if you don’t want to take out a loan.
Benefits of Financing Business Equipment
There are many benefits to financing business equipment, making it a popular option for businesses of all sizes.
Conserve Cash Flow: Using a loan to purchase business equipment results in lower upfront costs to conserve resources and free up cash for operating expenses. This is ideal for startups and small businesses that can’t afford to purchase new equipment outright but need the equipment to operate.
Combat Inflation: Loan payments are fixed throughout the life of the loan. Essentially, you’ll be able to charge more for the services and products you build with the equipment without having to worry about fluctuating interest rates; the cost of the equipment will decrease, and your revenues may increase.
Ownership: There are many benefits of owning business equipment, especially if it’s the equipment you need to effectively run your business. Owning your equipment means you can use it and abuse it for the tasks you need to complete, but it also comes with additional responsibilities like regular maintenance, and you should also have business insurance through a broker to cover the cost of replacing it in case something happens, such as theft.
Tax Advantages: Business owners can write off the purchase price of new and used business equipment, so they can claim a deduction for any equipment they purchase to help their business operate efficiently.
Disadvantages of Financing Business Equipment
Financing business equipment is a no-brainer for businesses that don’t have additional cash to pay for equipment outright. However, it does come with some disadvantages.
Risk: If you stop paying on your loan, the lender who gave you the loan can claim your business. Additionally, defaulting on a loan can reduce your credit score and impact your ability to take out another loan for business equipment in the future. At the very least, the equipment you need to run your business will be seized.
Down payment: In most cases, you’ll need to put money down on the equipment before you can use the loan to pay for the reset. Loan down payments can be as steep as 20 percent, so you might need to save up before you go searching for a lender.
Obsolete equipment: Business equipment constantly evolves, so you might try to purchase something that will be obsolete in a year or two. However, instead of paying for equipment that might only help your business in the short term, you should try to find solutions that can help your business grow without the need to take out more loans for better equipment every few years.
Limited financing: If you’re running a new business, you may have limited financing options. Getting a loan for a new business is harder than getting one for a business that has established credit.
Other Options for Getting Business Equipment
You don’t have to secure a loan to buy business equipment. Of course, you don’t have to purchase business equipment at all. Other options for securing business equipment include:
Purchasing Outright
If you can afford to purchase your equipment outright, there’s no reason not to, especially if the equipment is something that will be used for years without the need to upgrade soon. In addition, purchasing equipment outright can help you save money because you won’t have to deal with interest rates or high monthly payments. Instead, you’ll pay for the equipment as soon as you purchase it, and that’ll be the end of it. Of course, after you own the equipment, you’ll be responsible for regular maintenance and repairs, but you can expect some sort of warranty if there’s a malfunction.
Leasing
Leasing equipment is another great option, especially for equipment that evolves yearly. If the equipment you use comes out with new, better features every year, you might choose to lease instead of buying to get the new features without a hefty down payment. Leasing options may vary by company, but all leasing will offer you the option to buy the equipment when the term of your lease expires.
Leasing equipment is typically best for businesses who need short-term equipment needs or need to update their technology frequently because it allows them to get better equipment at the end of their lease or renew it if they like it. Additionally, it’s a good option for businesses that need to save some money until they can purchase the equipment themselves.
Renting
Leasing and renting are similar, but you typically rent equipment from the supplier for a short period. Renting equipment allows you to use it for short projects without the need for continual use and might be good for businesses trying to enter new markets or creating new products and aren’t sure if it’s something they want to invest in.
Financing, Buying, Leasing, or Renting?
All the options listed here are a great way for businesses to get the equipment they need to operate efficiently and effectively. However, your choice will depend on your budget and business needs. For example, if you only need the equipment for a short amount of time, renting or leasing might be a better option. However, if the equipment will be used for years to help you achieve your business goals, you might want to consider purchasing it outright or securing a loan.
Author Bio
Ashley Nielsen earned a B.S. degree in Business Administration Marketing at Point Loma Nazarene University. She is a contributing writer at 365businesstips.com where she shares knowledge about general business, marketing, lifestyle, and financial tips. During her free time, she enjoys being outside, staying active, reading a book, or diving deep into her favorite music.
