Should you take out a loan or should you rent and save that purchase decision for a future date? These are the basics of loans vs. leasing for small businesses.
As an entrepreneur, you may be looking to invest in new machinery, technology, or other types of expensive equipment to take your business to the next level. But equipment can be expensive, and you may not have the spare cash to pay in full upfront.
Should you take out a loan to pay for it, or should you rent and save that purchase decision for a future date? Get to know these two options and which might best fit your business’s circumstances.
How Does an Equipment Loan Work?
Equipment financing is a loan that helps you get new or used equipment right away by using the equipment itself as collateral. The application process typically only takes a few days, and once you’re approved you’ll make steady payments toward your borrowed principal plus interest and fees.
Because of the security your equipment provides, you typically won’t need to provide as much paperwork to your lender during the application process as you would with other types of loan products. Likewise, many lenders will approve young businesses, or those with less-than-stellar credit, for equipment loans more readily. If you’ve shied away from financing because of concerns about meeting a lender’s requirements, take another look at equipment loan options—you may be more qualified than you think.
One notable risk with equipment financing is that by the time you’ve fully paid off the loan, the equipment could be obsolete. Keep in mind that with interest and fees, getting an equipment loan will cost you more in the long-run than purchasing that equipment flat out. However, it may be worth it if you don’t have the cash or want to avoid depleting your resources.
How Does Equipment Leasing Work?
Like an equipment loan, equipment leasing involves making steady payments over an agreed-upon period of time. Leasing usually does not require any collateral or money down. Once your lease is up, you may be presented with the option to renew your lease, end your lease and return the equipment, or buy the equipment.
If you know a piece of equipment will become obsolete or only need it temporarily, equipment leasing may be the way to go.
Keep in mind that, unlike an equipment loan, you won’t necessarily own your equipment once your term is up, which may or may not suit your business.
Either option may come with different tax incentives, so make sure to consult an accounting professional.
Questions to Ask When Choosing Between Leasing and Loans
How long will I use this equipment?
Does your business need this equipment for a specific project or period of time? Do you anticipate needing it in the future? If not, leasing is likely your best option. If you’re interested in retaining the equipment permanently as part of your company’s growing pool of assets, plan on purchasing once your lease is up (make sure the leasing company gives you that option), or consider a loan.
Does this equipment run the risk of becoming obsolete in the near future?
This question is especially pertinent to those in medical and technological fields. If your equipment tends to become obsolete within a few years, leasing is your best option. You likely don’t want to risk your investment becoming useless before you’ve paid off your loan—not to mention being stuck with outdated equipment.
Do I have old equipment to trade in?
Leasing equipment often gives you the opportunity to trade in your old equipment, saving you the trouble of finding a buyer and putting a little extra cash in your pocket.
What’s the state of my credit?
If your business is healthy and mature enough to be seeking other types of financing, and you’re concerned about saving your credit for other needs, leasing may be a better option than a loan. On the other hand, if your business is young and you’re eager to start building credit, an equipment loan might be just the solution.
After weighing these choices, you may want to reconsider purchasing as an option, too. It’s often the cheapest way to get what you need in the long run, despite the hit to your cash flow up-front—both equipment loans and equipment leasing will likely cost you more over time.
Take a big-picture view of your business and the boost you hope your new equipment will provide. Whatever you decide, take pride in knowing you’ve made an investment in your company’s growth—and get ready to enjoy your brand-new gear.