Should you finance or lease business equipment?
Although both options help break down the overall cost of business equipment into smaller amounts, they are very different in how they’re set up.
If you decide to finance your equipment, you own it outright because you are purchasing the equipment and spreading out the purchase price over several years. You maintain ownership during and after all the payments have been made.
When you lease equipment, the lender owns the equipment and you’re paying for the use of it. Now there are different types of leases so it’s important to understand when you should use a capital lease versus when to use an operating lease.
A capital lease is more commonly used than an operating lease. If you plan to take ownership of the equipment at the end of the lease, then a capital lease is the right option. For example, if you are leasing a piece of machinery that you will use for a long time, you most likely will need a capital lease. Now keep in mind, there are many benefits that come along with owning equipment such as claiming the depreciation of it.
An operating lease is used if you are acquiring business equipment and you plan on replacing it at the end of your lease term. The rental cost of an operating lease is considered an operating expense for the business. Most likely operating leases are used for high-tech equipment, copiers, and computers.
When you decide what type of equipment your company needs there is much more to consider than overall costs of buying or leasing, you also should consider maintenance, tax deductions, flexibility, etc. Here are seven key tips to consider when it comes to business equipment financing & leasing.
Tip #1 – Be ready to clearly describe how the business equipment will benefit your business. An equipment financing provider may want to know a projection of increased revenues and cost savings gained from the use of the equipment.
Tip #2 – Review your credit report/scores and organize your financial information before contacting an equipment financing provider. Expect the equipment financing provider to request this information and be prepared to explain any issues.
Tip #3 – Don’t assume you’ll get the best terms from your bank or equipment manufacturer’s captive finance company. Take the time to compare rates, lease terms, fees and options that are available to you.
Tip #4 – Review your business credit report and update any information that is outdated or incorrect prior to contacting an equipment financing provider. If you have any negative information reporting, be prepared to explain it to a potential finance provider.
Tip #5 – Do not submit multiple lease applications to various companies. When a lessor sees inquiries from other leasing companies it raises questions as to why other lessors rejected your application. Choose an equipment finance provider that caters to your kind of business for a greater chance of approval.
Tip #6 – Know the difference between a fair market value lease and a $1 purchase option lease. A FMV lease provides low monthly payments, great flexibility at the end of the lease term and tax advantages. If you choose the $1 purchase option lease you’ll get to purchase the equipment at the end of the lease for $1. Compared to the fair market value lease, the monthly payments will be higher, but you’ll also have depreciation and other tax incentives as well.
Tip #7 – Combine multiple business equipment purchases under one lease. To keep things simple and cost effective it’s best to identify what types of equipment your company needs and bundle the leasing into one single payment. Doing this can possibly enable you to get a better deal compared to the latter.
Business equipment financing and leasing provides business owners the ability to increase revenues and keep up with new technology or machinery. With equipment financing, a credit savvy business owner can save money and avoid spending large sums of money on business equipment
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