When a small business wants to obtain new equipment, there are a couple of different ways to do so. You have the choice to either lease or finance an equipment acquisition.
For many years, the two methods were very different from an accounting standpoint. However, due to recent changes to the Generally Accepted Accounting Standards, financing and leasing are now quite similar. Although the differences are subtle, understanding them allows you to make the best decision when your business needs equipment.
For an equipment financing definition that’s straightforward and relevant to your business, take a look below!
What is Considered Equipment for a Business?
Now that we’ve established a foundational understanding of business equipment, we can discuss the different ways to obtain it. One option is to finance the equipment. So what is equipment financing?
Equipment financing is a process in which a business takes out a loan to purchase a piece of equipment. When the business enters into the loan agreement, they agree to make periodic payments on the equipment (including interest) until the full amount is paid. Once the loan is paid, the business owns the equipment outright.
The company providing the equipment financing loan will mitigate the risk of lending by requiring some form of collateral. In some cases, the equipment will suffice. So, in the event that you cannot make payments on the loan, the lender will take back the equipment. In less common cases, lenders may require you to put up a business or personal asset as a form of collateral.
The equipment financing definition above is helpful, but it’s easier to understand in terms of a real-world example.
Many businesses don’t have the ability to pay large sums for the necessary equipment. Equipment financing lets a business secure the tools they need and break payments up into manageable amounts that it can pay back over time.
What is Equipment Leasing?
With a solid equipment financing definition down, let’s turn our attention to another common question: what is equipment leasing?
An equipment lease is similar to equipment financing. The major distinction between the two is who owns the equipment.
When you lease, the leasing company owns the asset and allows you to use it for a monthly fee. Generally, at the end of the initial term of the lease, the asset ownership converts to you for a nominal fee, usually $1.00.
In other words, with a loan, you are paying back the money you borrowed to purchase the equipment. The equipment is yours. With a lease, you are paying the owner of the equipment who is allowing you to utilize it. The equipment is not yours until you pay the full amount to the company that you’re leasing from. However, not all leases guarantee transfer of ownership over to you.
If you choose to lease, be sure that you carefully read the document that pertains to ‘equipment ownership’ and what you must do to advise your leasing company of your intent to buy the equipment at the end of the lease term.
After decades in the industry, we have seen many leases and financing agreements play out. In our opinion, financing is much cleaner and safer than leasing. However, each business is different. We can help you understand the benefits and risks of each option as they relate to your company.
Simplify Your Equipment Search at Charter Capital
Both equipment financing and equipment leasing accomplish the same thing; they allow you to add the equipment you need to grow your business or simply replace an asset for a fixed monthly expense. Charter Capital provides businesses in a wide range of industries with access to the financing and leasing agreements that work for them.
Let us put our decades of experience to work for you. If you would like more detail on this, reach out today. We’ll gladly answer your questions.