Depending on your industry, you may need to regularly purchase equipment for your business. This can get expensive. And for most of us, dropping a bunch of cash at once isn’t really practical. These days, more small business owners than ever are faced with the question “Should I get equipment financing?”.
Lacking a “war chest” of cash and considering equipment financing and leasing is a dilemma faced by both new business owners and seasoned veterans. That’s why many smart business owners turn to equipment financing and leasing to get the tools and machinery they need.
While this strategy is helpful when your cash flow is tight, it can also have many other not-so-obvious benefits. Just be sure your business credit scores are up to snuff before applying to help your chances of getting approved at the best rates. Approvals are typically based on credit scores, collateral, company financials and equipment value.
Without further ado, let’s review the different ways equipment financing and leasing can help your business grow:
- You can get full financing. When you get a loan to purchase equipment for your business, most lenders will give you funds to cover the entire price. This means no down payment, so you won’t have to initially pay anything out of pocket.
- Capital can be preserved. The availability of 100% financing allows your business to preserve more capital. Depending on how long you’ve been operating, you may have a sizeable cash reserve. But that doesn’t mean you should put it all into one investment at once. Because you can pay down the equipment purchase over time, you’ll have more money free to invest in other ways.
- Testing before purchase. If you lease equipment, not only will you preserve capital, but also get the opportunity to test it out before committing money into equipment that may not provide the return you expect.
- You get access to cutting-edge equipment.When the latest technologies hit the market, a business may be put in a position to sink or swim. Without the newest devices, your company may not be as competitive, but purchasing innovative equipment each time it becomes available is not a feasible option. With financing and leasing, you can get cutting-edge technology now without straining your business budget.
- You reduce your obsolescence risk. If the equipment you’re leasing becomes obsolete, your lessor bears this risk. You won’t be responsible for any updates, disposals or replacements. This can be especially beneficial if your business needs equipment that tends to be quickly updated with better capabilities.
- Helpful for your balance sheet and taxes. When you lease equipment, it is listed as a business expense rather than a long-term debt. This way you’ll have fewer outstanding debts that could impact your ability to obtain additional financing in the future. Plus, the IRS allows for lease payment to be fully deductible as long as your business uses the equipment.
- Business credit stays healthy. It’s important to keep your business credit healthy…and available. Accessing capital for expansion, staffing and other operational expenses demands solid credit, and having an open business credit line allows you to respond immediately in a time of need. Leasing allows you to keep your business credit line open.
When it comes to answering the question “Should I get equipment financing or lease equipment”, every business will have their own specific considerations, and way of doing things. It’s up to you to decide what makes the most sense for you. I hope I’ve been able to help shed some light on why leasing and financing should always be considered.
About the author:
Jared Proctor is the Content Manager at Creditera, the first site giving small business owners free access to their personal and business credit data, along with tools to help them build credit. Jared has over fifteen years of financial services experience and has written extensively about issues impacting small business.