Making Sense of Equipment Financing | The Business Finance Store

Equipment financing refers to buying or leasing equipment needed to operate your business and make a profit. Mainly, there are 4 ways of equipment financing:

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Nowadays, the most commonly used method is equipment leasing. Approximately 80 percent of US companies lease equipment. Thus, let?s focus on this aspect of equipment financing, as you?ll likely end up taking this route.

Types of Equipment Leases

There are 2 types of equipment leases: capital leases and operating leases. The difference between these two is that a capital lease will be shown on the balance sheet as an asset of the company while an operating lease is an expense on the income statement. For a capital lease, you make a monthly payment during the lease period and buy the equipment from leasing agencies at a reasonable price.

Benefits of Equipment Leases

There are several benefits of equipment leases. These include the following:

• Lower monthly payments as compared to a loan
• Tax advantages
• Fixed-rate financing
• No down-payment
• Immediate access to the latest equipment

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Drawbacks of Equipment Leases

On the down side, you may have difficulty leasing equipment in the early stages of your business, as you it won?t have much credit to leverage. Also, the total payment in the long run is higher for some equipment. Additionally, the commitment of maintaining a piece of equipment for a long period of time may not be worth it if the technology changes quickly in your industry. This could be especially true in cases of information technology, given the rapid evolution of such devices.

Also, be wary of open-ended lease agreements, as they can involve hefty balloon payments and may require you to pay the difference if you return the item at value that is lower than stated in the contract. Thus, closed-ended lease agreements are typically the only type you should consider, but be sure to read the fine print in either case.

Where to Get an Equipment Lease

When it comes time to obtain an equipment lease, you can do so through the following options:

• Banks
• Brokers/Packagers
• Captive leasing companies
• Equipment dealers and distributors (subsidiaries of equipment manufacturers or other firms)
• Independent leasing companies

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The Bottom Line

Equipment financing can be achieved through an equipment lease, equipment loan, equipment sale and leaseback or a municipal equipment lease. The most common type of equipment financing is an equipment lease, given that approximately 80 percent of US businesses lease at least some equipment. With it, you?ll get benefits such as lower monthly payments and fixed-rate financing, but the downsides include difficulty obtaining a lease and a higher payment in the long run. Thus, be careful before signing on the dotted line with an equipment lease or any other form of equipment financing for that matter.

Source: https://www.businessfinancestore.com/2012/10/12/making-sense-of-equipment-financing/

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