A business needs reliable equipment to operate. Whether the gear is medical or made for farm or truck, swapping it out for the newest models is costly. Financing can let businesses obtain and upgrade equipment while holding on to cash.
Equipment financing is a way of acquiring new equipment with a loan or lease from a financial institution that spreads the payments for that equipment out over time. Your company can buy or rent the gear without a hefty upfront fee.
Equipment financing is flexible. It covers gear ranging from a fleet of forklifts or service vehicles to a yard of large work boats, or even a corporate jet.
Laptops can also be financed. But David Feldser, who leads equipment financing sales for the East Region at J.P. Morgan, notes that most companies find outside financing more attractive when they need equipment that starts around $100,000.
Big industrial manufacturing equipment is also financed and that machinery, he says, can run from $3 million to $20 million.
Distinct Advantages
Equipment financing comes with distinct advantages.
Expansion. Breaking into a new market, launching a product or scaling up for demand often takes more production. And financing can pay for the purchases necessary for that expansion.
Working capital. The cash used upfront to pay for needed equipment is money that could have been invested or used in another strategic way. Equipment financing lets businesses use and preserve their capital for other purposes.
Efficiency. Up-to-date, quality equipment can streamline production, save energy, or boost productivity. In some cases, says Feldser, a business can earn and save more than the interest it pays on the loan, so the asset can be worth far more than the cost of the debt.
A Loan or a Lease
Equipment financing comes in two forms: a loan or a lease.
Equipment loan. A business borrowing for an equipment loan holds title, but the lender keeps a lien on that asset as security interest. The equipment acts as collateral until the loan is repaid, when the lien will be removed. Terms vary depending on the value of the asset and can run up to seven years. Some lenders might require a downpayment.
Equipment lease. The lessee pays for the asset over time, but ownership stays with the lessor during the whole term. At the end of the lease, the lessee can return the equipment, buy it or extend the lease.
When you decide on the path that suits you, these factors can come into play.
Your choice between loan and lease often depends on how much you think the equipment will be worth over time. Feldser says that if you think the equipment will keep a lot of its value, then a loan can make sense, because after you’re done paying, you keep all the equity in the equipment.
A construction company buying a crane, a piece of machinery that lasts for a long time and holds its value well, in Feldser’s words, is likely to prefer owning the equipment.
If you expect the equipment to lose value, you may find leasing a better fit. Equipment that ages fast or risks becoming obsolete could be best leased. With a lease, a company can simply return the equipment to the lessor and get another brand new model when its technology has been surpassed.
A lease may work well for the finances of your business if owning the equipment doesn’t fit the model or goals you have in place.
Feldser uses the example of a large shipping company. Its core competency, he says, is logistics, not managing equipment. The company also has higher value uses for its capital than owning equipment. It may decide to lease its fleet.
On the other side, a loan may make more sense when owning equipment supports the business model. A construction company can sell the equipment for value.
Feldser adds that owning can give such companies a source of profit aside from their building work.
Shop Around for a Lender or Lessor
Once you’ve decided between a lease and a loan, you can shop around for a lender or lessor. Find one that treats you fairly and is open about its rates and fees.
You may find it helps to work with a lender you know or one that will take the time to build a relationship with you.
Ask yourself: Does this lender know my business? Do they understand how I make money?
A lender who understands the details of your business, where you’re going and why, is able to guide you to the strategy for financing that will serve you best.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
