Equipment financing can be a great way for businesses to grow, expand, or jumpstart their operations. By providing the capital needed to purchase equipment, businesses can avoid taking on debt or using funds that could be better used elsewhere.
Companies of any size turn to equipment financing providers and brokers to get the equipment they need to keep their businesses running. Small business owners, in particular, find that equipment financing can be a lifeline when they need to purchase expensive equipment but don’t have the cash on hand to do so.
The Difference Between Equipment Financing and Leasing
Equipment financing and leasing are two popular options for businesses to acquire the necessary assets without the hefty upfront costs associated with purchasing equipment outright. While they serve a similar purpose, there are key differences between these two financing methods that businesses should consider when making a decision.
Equipment Financing: With equipment financing, the business typically takes out a loan to purchase the equipment. This means that the business owns the equipment from day one and can claim depreciation and interest deductions on their taxes. One of the benefits of equipment financing is that ownership provides more control over the asset, allowing for customization or resale.
Leasing: In leasing, the business doesn’t own the equipment. Instead, they pay regular lease payments to use the equipment for a specific period. At the end of the lease term, there may be options to purchase the equipment, renew the lease, or return the equipment to the lessor. Leasing allows for the use of assets without the long-term commitment of ownership.
Equipment Financing: While equipment financing often requires a down payment, it’s typically lower than the upfront costs of purchasing equipment outright. The rest of the equipment’s cost is covered by the loan.
Leasing: Leasing usually requires minimal upfront costs, making it an attractive option for businesses with limited capital. Leasing payments are spread out over the lease term, which can ease the financial burden.
Equipment Financing: Businesses have more flexibility in terms of how they use and modify the equipment since they own it. They can also choose how to dispose of the asset once it’s no longer needed. This benefit of equipment financing makes it worth it for many businesses.
Leasing: Leasing offers flexibility in terms of upgrading to newer equipment at the end of the lease term without the hassle of selling the old equipment. However, lease agreements may have restrictions on customization or modifications.
Equipment Financing: When financing equipment, businesses can often claim tax deductions for interest expenses and depreciation on the asset, which can provide potential tax benefits.
Leasing: Lease payments are typically deductible as an operating expense, offering potential tax advantages. However, businesses may not benefit from depreciation deductions since they don’t own the equipment.
Long-term vs. Short-term
Equipment Financing: This option is typically better suited for businesses with long-term equipment needs or assets that have a longer useful life.
Leasing: Leasing is ideal for businesses with short-term equipment requirements, those looking to keep up with technology upgrades, or startups with limited capital.
The choice between equipment financing and leasing depends on the specific needs and financial situation of the business. Equipment financing provides ownership and tax benefits but requires a larger upfront investment. On the other hand, leasing offers flexibility, lower initial costs, and is better suited for short-term needs. Careful consideration of these differences is essential to make an informed decision that aligns with the business’s goals and financial resources.
Why Companies Choose to Finance Equipment
Businesses choose to finance equipment for several compelling reasons. Firstly, equipment financing allows them to acquire essential assets without depleting their working capital or resorting to substantial upfront payments. This conserves liquidity for other operational needs and unforeseen expenses.
Secondly, financing provides flexibility in structuring payment terms, such as fixed or variable interest rates, and can often be tailored to suit the company’s budget and cash flow. Additionally, by financing equipment, businesses can benefit from potential tax advantages, including deductions for interest expenses and depreciation, which can reduce their overall tax liability.
Furthermore, equipment financing helps companies keep their technology and equipment up-to-date, ensuring they remain competitive and efficient in their respective industries. Overall, equipment financing serves as a valuable tool for businesses to access the assets they need while maintaining financial stability and optimizing their tax positions.
Benefits of Equipment Financing For Businesses
The benefits of equipment financing are numerous, but here are 10 of the most impactful:
1. Get the equipment you need without using up your working capital.
When you finance your equipment, you can free up your working capital to be used for other purposes, such as inventory or expansion.
2. Preserve your credit line for other purposes.
If you use your credit line to finance equipment, you may not have as much available to you for other needs. It’s best to keep your credit line available for other purposes and finance your equipment separately.
3. Get tax benefits.
In some cases, you may be able to deduct the entire amount of the loan as a business expense. This works best if the equipment is used for business purposes only because personal use will limit the deduction.
4. Enjoy fixed monthly payments.
With equipment financing, you’ll know exactly how much your payments will be each month. Fixed monthly payments can make budgeting easier and help you predict cash flow.
5. Improve your company’s balance sheet by keeping debt off of it.
By financing your equipment, you can avoid putting debt on your company’s balance sheet. This can be helpful if you’re trying to obtain additional financing or sell your business. It will also look good on your credit report and financial position.
6. Get flexible terms that match the useful life of the equipment being financed.
Equipment loans and leases usually have terms that correspond to the useful life of the equipment being financed. There may also be early payoff options that can save you money.
7. Be able to finance 100% of the cost of the equipment, including taxes and shipping charges.
With equipment financing, you can finance the entire cost of the equipment, including taxes and shipping charges. This can be helpful if you don’t have a lot of cash on hand.
8. Avoid having to make a large down payment which can tie up your working capital unnecessarily.
One of the biggest benefits of equipment financing is not having to put up a large down payment. The down payment is often 10% to 20% of the cost of the equipment. Equipment can be expensive, so this can free up your working capital significantly.
9. Qualify for financing even if you have bad credit.
If you have bad credit, you may still be able to qualify for equipment financing. There are many lenders who work with businesses that have less-than-perfect credit. Most of these lenders will look at your business’s overall financial picture, not just your personal credit score.
10. Get the equipment you need quickly.
Once you’re approved for equipment financing, the process is usually quick and easy. In most cases, you can have the equipment in your hands within a few days to weeks.
About Section 179 Tax Benefits for Equipment Purchases
One of the benefits of equipment financing is that you may be able to deduct the cost of the equipment as a business expense on your taxes. This is made possible by Section 179 of the tax code, which allows businesses to deduct the full purchase price of equipment that has been put into service during the tax year.
To qualify for the deduction, the equipment must be used for business purposes only. This means that if you use the equipment for both business and personal purposes, you will not be able to deduct the full amount.
The deduction is also limited to the amount of your taxable income for the year. This means that if you don’t have a lot of other business expenses, you may not be able to take advantage of the full deduction.
Popular Financing Options for Equipment
Popular equipment financing options include:
- Equipment loans
- Equipment leasing (both operating and capital leases)
- Equipment lines of credit
- Equipment sale-leaseback arrangements
- SBA 504 loans
- Vendor financing
These options cater to various business needs and financial situations, offering flexibility, tax benefits, and tailored solutions for acquiring equipment.
Contact Charter Capital today if you’re considering equipment financing for your business. We’ll work with you to find the best possible solution for your needs and help you get the equipment you need to keep your business running smoothly. Our experienced financial brokers have access to a wide range of lenders and can help you get the best possible terms for your loan.
Give us a call today to learn more about our equipment financing services.