Equipment Financing: Loans VS Leasing

In a world where every industry and market is growing immensely each day, having the right equipment to stay up to date, bring the best service ever, and stay ahead of the competition is essential. But the thing is, not everyone can afford it, especially small or startup businesses, which often need lending support from financing companies or any other financing organizations. Which is always a good option. But then again, not all businesses can afford even the loan's monthly payments. That’s when equipment leasing comes into play. If you are interested in both these options and want to know which is the best for you, we will discuss it today to give you a better view and understanding.

Equipment Financing: Loans VS LeasingEquipment Loans

A loan requires the business to commit to buying the equipment from a supplier. On behalf of the company, the lender arranges for financing. You pay down the principal plus interest over time. You own the equipment outright after covering the final payment. The equipment will appear as an asset on the balance sheet, with a corresponding obligation. Because of Section 179, a tax deduction that allows you to potentially write off the entire purchase price of eligible equipment for the tax year in which the equipment was acquired, equipment loans have grown increasingly popular in recent years.

Since the deduction applies regardless of how the equipment is obtained, small businesses may easily take advantage of Section 179. It's a win-win situation for small businesses since they acquire the equipment they need to succeed while also lowering their tax cost. Section 179 applies to most "business equipment" purchases, but there are certain restrictions, so double-check that any purchases you want to make are tax-deductible.

Equipment Leasing

You don't own the equipment outright when you lease it. Instead, the lender buys the equipment from a vendor and rents it to you monthly. You have the option to buy the equipment, extend your lease, or return it after your lease. There are two main types of equipment leases: operating leases and capital leases.

An operating lease usually has lower monthly payments since it implies a high residual value (similar to a car lease). The contributions are usually considered an expense and are therefore tax-deductible.. This type of lease allows the business owner to pay a Fair Market Value (FMV) purchase price to acquire the equipment after the lease period.

If you have a short-term requirement or don't know how long you'll need the equipment, an operating lease may be a smart solution. The total amount of lease payments are usually less than the equipment's initial cost, lowering your financial responsibility and giving you more flexibility when contracts alter.

A capital lease makes greater monthly payments than an operating lease, is structured more like a loan, and has a lower residual. Like a regular loan, the debt and its related asset, including depreciation, are represented on the balance sheet. Although it seems to be a lease, it does not provide all of the benefits of a typical lease.

Should You Lease or Finance Equipment?

Both choices are appealing for various reasons. Instead of presuming that one is better than the other, look into the specifics. Determine what type of equipment your company requires to advance to the next level, then research the financial implications of leasing vs. taking out small business equipment loans for that specific equipment.

Also, consider how much money you have for a down payment, how long you expect to need the equipment, and if you'll be able to qualify for a loan or a lease.

If you can’t decide or are still confused about which one is best, Equipment Financings is here for you. We will work with you to get the best solution customized to your business and industry’s needs. Get started today!