Commercial equipment financing and leasing options
So you’re in the market for new (or used) equipment for your biz. If you’re shopping for heavy machinery in the construction field, commercial kitchen appliances, or even just a simple box truck for local operation, the item you need is going to be an investment.
Depending on your financial health, preparing for such an expense might require tying up some of your cash flow. Fear not, forking over a large lump-some down payment can potentially be avoided. All you need is a little information in your back pocket to make the best decision for you and your business. Small business owners like yourself can acquire this expensive machinery through Equipment Financing or Leasing.
In this article, we’ll explore different equipment financing options, including the advantages and disadvantages of each type.
Check out these related articles
- How to Get Commercial Truck Financing with Bad or No Credit
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- Commercial Equipment Finance: How Does a Repayment Plan Work?
The difference between leasing equipment and buying it
When you lease a piece of equipment you are paying a monthly fee for an essential tool that you need to operate your business, much like leasing a car. At the end of the contract, you can renew the lease or purchase the equipment. Equipment financing, on the other hand, is a self-collateralized loan that allows you to own the equipment.
In the land of opportunity, there are many ways to find the right financing options that best suit the heavy equipment you need. If purchasing equipment makes the most sense for your operations there are three main ways to obtain funding.
- In-house financing through your dealership of choice
- Your personal bank
- Commercial equipment finance broker who specializes in these particular kinds of business loans.
Taking out a bank loan is feasible for people or companies with good credit or access to an expandable line of credit. For others with a less satisfactory credit history or limited hard assets, qualifying for a traditional loan could be more challenging. Additionally, the process can be longer with more hoops to jump through.
Purchasing Equipment Pros & Cons
Advantages Of Taking Out A Bank Loan:
- Competitive Market Rates
Disadvantages Of Getting A Bank Loan:
- Extensive paperwork required
- Larger down payment
- High Probability of declined application
- Slow processing times
- May require secured collateral
- Tax liabilities
In-house dealership financing
This could be a great option for some, it’s a one-and-done deal and you can walk in and drive off with your new equipment the same day. Dealerships often have one or two go-to third-party lenders they work with, which could pose a possible problem, leaving you with only those two options of terms and agreement.
Now, let’s consider the third option, a commercial equipment finance broker.
Finding the right equipment broker is like finding a good CPA. You want this person on your side, knowledgeable, and pays close attention to detail. Empowering yourself with a broker with a vast network of lenders gives you options.
Purchasing equipment makes perfect sense for assets that will retain their value over a long time (+10 years), much like tractors and machinery. Depending on how your loan is structured, you can borrow all or most of the value of the equipment. This type of loan is also considered a secure loan, meaning it may not be required to sign other assets as collateral because the equipment is considered collateral itself.
Equipment Financing Advantages:
- Negotiating power at the dealership
- No balloon payment
- Equipment ownership
- Tax benefits up to $500,000
- Easier qualification
- Limited paperwork
- Flexible down payment
Disadvantages of equipment loans:
- Higher payments than leasing
- Lower tax savings than leasing
How Does Leasing Equipment Work?
Leasing heavy equipment works the same way as leasing a car. Depending on the repayment terms of the lease, you agree to pay a set amount of money for a specific time, typically 36, 48, or 72 months. At the end of the contract, you get to decide whether you want to return the equipment or purchase it.
One thing to keep in mind is a standard equipment lease includes an FMV (Fair Market Value) residual clause. This clause requires additional payments at the end of the contract, should you decide to keep the equipment.
Further, equipment leasing offers attractive tax benefits. In some cases, you can deduct 100% of your lease payments from your taxes. Check with your trusted tax professional and accountant for more information on this topic.
Equipment Lease Advantages
- Quick funding
- Flexible down payments
- Easier qualification than bank loans
- Tax benefits
- Lower payments than loans
Equipment Lease Disadvantages
- Residual Clause – If you want to keep the equipment after the lease ends, you need to make another payment.
Equipment Loans and leases go by many names, even though they are necessarily the same thing:
- EFA’s (Equipment Finance Agreement)
- Capital Lease
- Finance Lease
- $1.00 Buyout
In a $1.00 Buyout, you make a payment for $1 after making the final payment on the loan. After this payment, you own the equipment outright.
To qualify, the piece of equipment must be listed as a depreciating asset. What makes Equipment loans favorable to borrowers is a tax break found in Section 179 of the tax code. Beginning In 2016, borrowers are eligible to immediately deduct the full cost of the equipment up to $500,000 from their tax bill.
Which is the best option for financing commercial equipment?
Every situation is unique, and many factors must be taken into consideration. Depending on your business objectives, a lease might make more sense than a loan, due to the tax benefits and scope of your projects.
If you were to buy a piece of machinery for $75,000 and finance it for four years with a loan, the write-off for depreciation would always be equal to $75,000.
When you take out an equipment lease, all payments can get written off as an operating expense – a significant tax ramifications. For companies that require the use of heavy machinery, this adds up quickly at the end of the tax year. It’s almost like a cash advance of sorts.
Further, it offers a sensible solution to companies and individuals with damaged credit or limited access to capital or collateral.
Instead of going through the loan process at the local bank, work with online lending and financing companies who specialize in this type of transaction. They stick to their business model and work hard to finance applicants.
Deciding What Financing Is Best For You
If you’re thinking about buying equipment for your business, research all the options available to you before making a financial commitment. It can make a difference in your bottom line.
Doing your homework on whether you want to buy or lease your commercial equipment may seem like a lot of work but once you run your financials you’ll have enough clarity to make the best decision.
Once you’ve chosen the direction you want to go, submit your information here so we can get the ball rolling on the financing your business needs.