Equipment financing uses loans and leases to purchase hard assets such as a car for a business. Qualification for the loan amount depends on the equipment value under purchase. This equipment serves as the loan collateral if the loanee cannot repay the loan and the lender can seize it.
The loan size matches the equipment price, with the loan term matching the duration expected to use the latest equipment. For example, if the equipment is a car intended for ten years, a ten-year term loan is ideal. Shorter terms may give scrambling to make payments.
Many factors push business owners to use equipment financing, such as a business owner might require expensive equipment but cannot afford it or don’t want to purchase it upfront. Also, he/she might need to replace the equipment frequently as they have a short lifespan. Following are the equipment financing pros and cons:
Pros
- Among all financing options, an equipment loan usually carries the lowest interest rate.
- Equipment ownership starts after repaying the loan. Business owners can arrange a sale-and-leaseback agreement for other business purposes if they possess unwanted equipment. The process involves selling the equipment to a financier for quick money and then leasing it from the same financier.
- Business owners who opt for equipment financing options enjoy the benefit of depreciated tax at tax time.
Cons
- The financed equipment may become outdated, forcing the business owner to dispose of it.
- The equipment loan might require a very high starting down payment.
To most financiers, leasing is considered an efficient financing alternative. Equipment leasing helps in maximizing investments and reducing costs. As time lapses, a piece of equipment may become less valuable and productive; leasing might be the only option left to dispose of it. Some financiers may be willing to buy the equipment at its current market value.
However, leasing should be done at a limited time before the equipment losses too much. Equipment Leasing and Finance Association advises that leasing is a preferable option for equipment planned to be used for 36 months or less. Generally, leasing costs more than purchasing was the equipment used for a long time.