When it comes to buying equipment, business owners need to think the entire process through. Some of them out there might have saved up for it, but others like you and us don’t have enough cash to make the purchase right away. For individuals like that, equipment financing seems to be the best option out there.
When it comes to equipment financing, business owners have two options in front of them. They can either get equipment loans or take out an equipment lease. In order to choose between the two, it is important to understand what each one has to offer and what pros and cons each one of them comes with. So let us go ahead and look at them in detail.
1.EQUIPMENT LOANS
Equipment loans work very much like your regular personal loans that you take out for your car or house. Don’t have enough cash to buy the equipment? Choose a lender ad fill out an application just like a regular loan.
In most cases, you will need to pay a percentage of the total value of the equipment in advance as a down payment to the lender. On average, it is about 30% of the total value but can vary from lender to lender and also on the amount of cash that you have upfront.
Once you pay the down payment, similar to mortgage, the lender fund the rest of the equipment for you. You then need to make regular monthly payments that consist of interest and principal amount. Once you have paid back the entire amount, the equipment falls under your ownership entirely.
Pros
•You become the owner of the asset by the end of the loan term.
•You only need to pay a percentage of the total value as a down payment to acquire the equipment.
•Since you will own the equipment by the end, thus you can amortize the cost to make your books look more presentable.
•Your equipment acts as collateral; thus, there is no need for additional assets pledged as collateral.
Cons
•A down payment is a must. You can’t acquire the asset without a down payment.
•Since it is a conventional loan, thus, you need a credit score above 600 in most cases.
•The total cost at the end is more than the actual cost of the asset.
EQUIPMENT LEASES
In case you need the equipment only for a specified period of time and don’t wish to own it at the end, then the equipment lease is the best option for you. An equipment lease works differently than a loan. Instead of providing you with the capital to purchase the equipment, lenders provide you with the equipment that you need.
Since you don’t wish to own the equipment by the end of lease terms, thus you only pay the monthly fee to use the equipment. So, the ownership of the equipment remains in the name of the lessor while you, as a lessee, only have the right to use the asset for the signed period of time.
Pros
•You can get the equipment right away for use.
•The monthly payments are lower than traditional loan payments.
•You don’t own the asset at the end, so the minimum effect on the books.
•You don’t need to make a down payment.
Cons
•You won’t own the asset at the end.
•Leases are more expensive in the long run as compared to equipment loans.
•Leases don’t really have a positive effect on your credit history.
Final Words
Both equipment loans and equipment leases are a great option. But whether they are the best-suited one for your business depends on your business needs. So before you make a decision, make sure to consider all the important aspects so that you make the best possible decision for your business.
Guest post writer!