Which Is Better, Equipment Lease or Equipment Financing?
Equipment financing is a form of financing for any industry, where you acquire business essential equipment for a specific term rather than purchasing it outright using working capital. At the end of the term, you may have the option to buy the equipment, renew the lease, or return the equipment if there’s a buyout or balloon payment. Here are the top three forms of equipment financing.
For companies that utilizes heavy equipment and machinery, essentially equipment financing or loans for equipment can help your business expand with very little capital outlay to grow.
- FMV Lease – Fair Market Value – (True Lease): Payments are deductible as business expenses. No Section 179 deduction available because the lessee does not own the construction equipment. Alternatively, there is 10% FMV LEASE where regardless of the market value, your buyout is predetermined at signing rather than letting the Market Value dictate your buyout.
- Dollar Buyout Lease: Treated more like a purchase for tax purposes. Lessee can claim Section 179 deduction. (lease to own option)
- Equipment Financing Agreement: Treated as a loan. Lessee can claim Section 179 deduction but EFA is treated like a loan in taxes and ownership.
Leasing or Owning?
Leasing vs. Buying
- Equipment Leasing: Lower initial costs, ability to upgrade to newer technology, and tax benefits. Leasing companies may offer flexible terms like deferred payments. Your business can grow through financing without giving up equity or profit.
- Buying: Higher initial costs, lost opportunity to use cash for other profitable investment. Fixed asset shouldn’t be paid cash especially depreciating assets. Ownership of the asset yes but can’t monetize it for potential cashflow. You can collateralize it for other loans for better long-term cashflow funding.
Loans and Financing Options
- Bank Loans: Traditional financing through banks has the most competitive interest rates and terms; however, only for well-qualified borrowers who are well organized who can jump through hoops to get it. Going to the bank is guaranteed you’re going to an A Credit Lender. So, are you an A Credit borrower? Do you have your audited financial statements? Do you have personal financial statements prepped? How can you tell whether you’re bank approvable or not. Having good credit isn’t the only criteria they look at. Remember the “5 C’s” in credit underwriting requirements?
- Equipment Financing Companies: Specialize in commercial equipment. Equipment leasing and equipment loans my differ, offering tailored financing solutions like equipment finance agreement where it’s financing rather than leasing. There is no balloon or buyout at the end of the term.
- Vendor Financing: Many Trailer manufacturers offer in-house financing options to make purchasing their equipment more accessible. Vendor financing doesn’t always cover those with low or marginal credit. Our Equipment Vendor Financing programs cater to all types of credit. Our credit requirements are wider than most the benefit of working with a reliable and trusted equipment loan broker.
Understanding Equipment Financing and Leasing
Before signing equipment lease agreement carefully review the critical make up of the transaction. THere should be payment, terms, end of option and upfront cash needed at signing. Make sure you’re not signing an FMV Lease when the salesperson says dollar buyout but the contract is actual FMV or Fair Market Value. Key components to check include:
- Payment Terms: Understand the monthly payment amount and due dates.
- Interim Rent: Is there an interim rent, which is rent in between the time of the next billing from the date of acceptance or lease commencement.
- Maintenance and Repairs: Determine who is responsible for maintenance and repairs. Most equipment financing don’t apply unless warranty is added into the agreement and financing. If through the vendor, it will be through manufacturer warranty and services but not lender’s responsibility.
- End-of-Lease Options: Know your options at the end of the lease, such as purchasing the equipment for a dollar or $101 for some state like FL, renewing the lease it has a balloon, or returning the equipment.
- Early Termination: Be aware of any penalties for early termination of the lease. You may not pay any penalty for paying it early, but you’re still liable for the full term regardless of when you pay it off.
- Advance Payment: First and Last, security deposit or down payment might be required. Check your equipment lease agreement to make sure you are aware of any money upfront to consummate the lease financing agreement.
- Down Payment: Down payment reduces the amount financed.
- Security Deposit: Security deposit is typically refundable unlike down payment.
Budgeting for Financing
- Initial Costs: Some leases require a down payment, security deposit or initial fees like admin fees, first and last. Factor these into your budget.
- Monthly Payments: Ensure your cash flow can comfortably cover the monthly lease payments. Does the equipment make money. Does it work all year round? Lenders going to look for money in the bank to cover at least 3-6 months in payments.
- Additional Costs: Insurance, delivery, sales tax and other additional warranty or services that might be included in the equipment financing purchase. Operating capital to manage the equipment and the machinery.
Additional financing benefits you can qualify for to conserver working capital.
- *$99 for the First 6 Months:Get started with minimal upfront costs for well qualified lessee.
- 90-Day Deferred Payments:Pay nothing for the first three months.
- **if you get disqualified for equipment financing you might have an option for a Working Capital Loans:
It's A Business Decision
Equipment financing is one of many avenues a business owner can entertain when acquiring business essential equipment. A type of loan also known as “equipment lease” that enables businesses to acquire equipment without paying the full equipment cost upfront. This type of financing is crucial for industries that rely on heavy duty equipment and machinery, commercial equipment, medical equipment, commercial trucks and trailers, or technology hardware are just the few types of equipment that are typically financed when purchase.
As a business owner, you must make the right decision for your situation. Equipment financing can be tricky due to some implication from your balance sheet and taxes etc… So, always consult your professionals before making any final decision. Best wishes!
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