Many business owners experience hardship when it comes to maintaining the right equipment needed to guarantee success. The reality is that having the right tools to do the job is essential for a business to succeed but navigating the finances to equip a business with those tools can be costly. When it comes to purchasing equipment, business owners can utilize their operating cash flow and pay large sums up-front to secure the equipment they need, but there is also a variety of equipment financing programs that are available. Equipment financing allows business owners flexibility by extending the payment terms of large equipment purchases over time rather than paying all at once.
Equipment financing can typically be used to cover any kind of business operating expense – from vehicles to furniture to large machinery – and businesses that take advantage of these funding programs can often buy equipment through equipment financing plans at lower interest rates than with traditional loan options. There are two types of equipment financing products available for business owners: equipment loans and equipment leases.
Like most traditional loan options, equipment loans are typically a lump sum of money that a business borrows from a lender. However, with equipment loans, there is a restriction specifying that the funds must be used for equipment purchases. Another difference is that with equipment loans, the equipment itself is used as collateral to secure the amount borrowed. This is a benefit for many business owners who do not have other types of collateral to put up in order to secure funding, as the emphasis in the lending agreement is on the value of the equipment over the time of the loan rather than the credit history of the borrower, which is often more important for other types of loans.
An equipment lease program is similar to a traditional car lease plan – the business makes monthly payments to a leasing company in order to cover the equipment rental payments. Typically, a borrowing business will negotiate terms with the leasing company in order to set up the amounts of the monthly rental payments and the length of time for the terms of the lease. By leasing rather than making an up-front purchase, businesses can utilize upgraded equipment without the expensive hit on cash flow. Once the terms of the lease are up, there are usually three options for the borrower: end the terms of the lease and return the equipment; extend the terms of the lease and continue to make payments in order to continue using the equipment; or the option to buy the equipment outright from the lender.
Benefits of equipment financing and leasing
Equipment financing is beneficial for business owners because it gives them the opportunity to obtain the most effective and useful equipment without the ridiculous up-front payments for the entire equipment cost. There are several benefits of equipment financing for business owners, including the increase in working capital, the ability to utilize the best equipment, the tax benefits associated with equipment financing, freeing up other lines of credit, and the easy application process.
1. It can increase your working capital
One clear benefit of equipment financing is the increase in working capital that is available when a business decides to utilize equipment financing rather than large up-front equipment purchases. Almost every business owner experiences cashflow shortages at some point or another and equipment financing gives businesses an option to free up working capital for other expenses. When a business uses up their working capital to make equipment purchases, the cash flow available takes a big hit, which can leave many businesses short. By taking advantage of equipment financing instead, business owners can use their working capital to cover other operating expenses.
2. It helps you keep up-to-date with the best equipment
Another benefit of equipment financing is that is allows businesses to always take advantage of new technology by giving them the opportunity to obtain the most effective and efficient tools without worrying about the up-front cost. One restriction that prevents many business owners from attaining the equipment necessary for the job is cost – new, state-of-the-art equipment is not cheap, and not all business owners can afford the newest equipment. Equipment financing gives business owners the option to acquire the tools needed without the blow to working capital.
3. There are tax benefits for equipment financing
Another benefit of equipment financing is the tax benefit. Smart business owners know how to use tax breaks to their advantage, and it is important to build strong relationships with tax professionals in order to capitalize on all of the possible benefits. With equipment financing, the borrowing business typically will make payments to the lender over the course of the agreed-upon terms. With each payment, there is interest paid. For most equipment financing terms, the interest paid on the financing payments can be written off as tax-deductible. There are even bigger tax benefits with equipment leases, specifically – for most lease program terms, the business owner can write off the entire lease payment as a business expense, not just the interest paid. This means that over the course of the financing terms, with equipment leasing, the entire amount paid for the equipment can be written off by deducting the monthly lease payments on the annual tax report. Another tax benefit with equipment leasing comes from government incentives written into the tax code. According to Section 179 of the IRS Tax Code, the full amount of equipment purchases via equipment leases can be written off. Even if the borrowing business does not pay the entire amount for the equipment during the year they are filing taxes, the business owner can deduct the entire amount on their taxes for the year.
4. It can free up other lines of credit
Another benefit to using equipment financing is that it frees up other lines of credit. Instead of using a business term loan to apply for funds that will be used for new equipment purchases, business owners that utilize equipment financing for their equipment expenses will still have other credit lines open. For example, if a business wants to purchase a new piece of machinery, but they do not have the funds available, they could apply for a business term loan and receive a lump sum of funds from a lender, some of the funds they could use to purchase the new piece of machinery. However, in this case, the borrowing business will spend a large chunk of their business term loan on their equipment purchase, which might result in a working capital shortage. Instead, by applying for equipment financing to take care of the purchase for the large piece of machinery, if the business runs into a working capital shortage, they will still have the option to apply for a business term loan later. Equipment financing also uses the equipment itself as collateral to secure the loan, so any other collateral that a borrowing business can offer can be used to secure additional financing products.
5. It has an easy application process
There is one distinction when it comes to applying for equipment financing – the size of the equipment purchase. Applying for equipment financing for equipment costs up to $200,000 is extremely quick and easy, and the entire process – from application to closing – can often be completed within 24 hours. Costs under $200,000 are considered "small ticket" equipment purchases, and the application process is driven by the type and value of the equipment, as well as the credit quality of the borrowing business. If a borrower has strong personal credit, the business has been in good standing for a long time, and the equipment being financed will hold its value, borrowers can expect a very quick application process. For equipment that costs over $200,000, or "big ticket" items, the process is a little more complicated. For these larger equipment costs, the lender will typically need to collect more information about the business and the specific type of equipment, and the process might take up to a week or two.