There are as many as 28 million small businesses in the U.S., and 543,000 are opening every month. Those businesses are as diverse as you can imagine, but they do have one thing in common: the need for capital and equipment. Loans are popular sources of cash for many small businesses, 23% of which seek loans because of slow sales and 50% of which simply opt to use their personal credit. When it comes to equipment, however, options become a little more limited. Merchant cash advances, which provide immediate funds in exchange for an interest profit on credit card transactions, aren’t recommended for use on heavy equipment, and few businesses have the cash just laying around. Enter heavy equipment loans.
It can be difficult to decide between commercial equipment financing and leasing. Every company is different, as is every situation, and it takes careful consideration to make the right decision. Let’s look at both options.
Though leasing equipment preserves capital and provides flexibility, it often costs more in the long run.
Advantages of Leasing Equipment
- Lower initial expenses. The major advantage of leasing is that it enables you to acquire assets without much initial expenditure. Leases rarely require down payments, so it’s easy to get the equipment you need without creating cash flow problems.
- Tax deductions. Lease payments can often be deducted as business expenses on your tax return.
- Easier upgrades. For equipment that outdates quickly, leases are handy as they enable business owners to move on when equipment becomes obsolete.
Disadvantages of Leasing Equipment
- Higher cost. Leasing equipment is almost invariably more expensive than purchasing it.
- No ownership. When you lease, you don’t build equity on the equipment.
- Full-term obligation. Even if you stop using the equipment, you’re obligated to make payments for the entire lease period.
Commercial Equipment Financing
Ownership and tax breaks are major advantages to purchasing equipment, but high up-front costs are deterrents for many business owners.
Advantages of Buying Equipment
- Ownership. This obvious benefit to commercial equipment financing is especially important for equipment that has a long, useful life and that is unlikely to become outdated quickly.
- Tax incentives. Newly purchased assets can be fully deducted, according to Section 179 of the Internal Revenue Code.
- Possibility of depreciation deduction. Some equipment is not eligible for Section 179 treatment, but can still produce tax savings through depreciation deduction.
Disadvantages of Buying Equipment
- Higher up-front costs. The initial cash outlay is too much for some small businesses. Even if equipment loan rates are low, you’ll probably be responsible for a down payment of about 20%.
- Early obsolescence. Ownership is an advantage to buying equipment, but it can also be a disadvantage. If equipment becomes technologically obsolete, you may be forced to reinvest in new equipment fairly quickly.
What’s the Verdict?
Neither option is the right one for every scenario. Try to estimate the approximate net cost of the asset, factoring in tax breaks and resale value. Once you’ve determined which option is more cost effective, think about possibilities like the object falling into obsolescence or your need for the object ceasing before the expiration of the lease. It’s an important decision that deserves plenty of consideration, and at the end of the day, your bottom line should be the biggest factor. Read more blogs like this.