There’s a common misconception among business owners that loans are good and leases are bad. In reality, there are many factors you need to consider before deciding which option is right for your business when it comes to equipment. Both loans and leases are financial tools with different pros and cons. You may be surprised to know that in many situations, equipment leasing can be the better choice for your business.
Factors To Consider When Deciding Between Equipment Leasing and Equipment Loans
One factor that can affect your decision is the amount of available working capital you have every month. Another factor is your credit score. You also need to consider how long the equipment you need will stay current. Will you need to upgrade it in a few years?
Finally, think about the value of owning that particular piece of equipment. Is it something that is going to last for 20 years or more, providing decades of high-quality service?
Down Payments
One of the biggest differences between equipment loans and leases is the size of the down payment you need. Many equipment leasing options provide 0% money down or a small down payment. You can get the equipment you need with minimal hassle and money investment.
With loans, you often need to plan for a down payment of 10–20% or more to get the best interest rates. For a piece of equipment worth $150,000, that would mean having between $15,000–$30,000 ready to go.
Upgrades
Equipment leasing is often the financing method of choice for technology. If your business wants to buy equipment that is constantly changing, you have to consider when it will be worth it to own the item after 5–10 years.
With a lease, you can upgrade at the end of every lease term, or every 2–3 years. When looking for high-tech software, computer equipment, and other state-of-the-art equipment, leasing is often the way to go.
Working Capital
Few things are as important to small businesses as working capital. It’s literally money in the bank for a rainy day. Your working capital helps you keep your business running smoothly, purchasing inventory and handling payroll.
If you have cash flow issues, equipment leasing is better because the monthly payments are generally much lower. That helps you put your capital where you need it without problems.
Whatever type of financing you choose, it’s obvious that your business needs equipment. Using all of your company’s savings to purchase equipment isn’t a wise idea because it leaves you without funds for emergency needs.