Obtaining all the necessary equipment to run your business is often cost-prohibitive. Equipment financing is a specific type of lending that provides capital to fund your purchases.
How Does This Funding Work?
Banks offer these loans with particular spending requirements. The articles themselves serve as collateral to back the amount borrowed. Therefore, they have less stringent qualification requirements, making it an ideal funding source for startups or those with less than excellent credit scores.
With this asset-based lending, financial institutions typically offer 100% of the equipment value. You will not need to provide additional collateral, but some lenders do require a down payment. You can secure lower interest rates if you can put more money down upfront.
Repayment terms for this kind of financing are typically between five and six years. Sometimes, a bank may base the loan terms on the equipment’s life span to reduce its financial risk.
Is Leasing a Good Idea?
Leasing these essential purchases are a good option for companies that must upgrade machinery or computers often. When items have a short life span for your industry, it may not make sense to purchase them outright as you will need to spend a large amount of capital every few years to replace them.
Leases allow you to obtain the things you need with less initial expense as they generally do not require any down payment money. This benefit preserves your working capital for other operational uses.
This equipment financing option is useful for those with poor creditworthiness or short business history. It is easier to obtain and has flexible terms, enabling you to spread out the cost over a longer time to fit your business plan. These payments are usually tax-deductible as well.
What Are the Benefits of Purchasing?
Owning items rather than leasing them can be advantageous if the equipment is unlikely to become technologically outdated soon and remains useful for a long time. Consider buying things such as farm machinery or office furniture that will not need updates or replacements within a short timeframe.
Owners can fully deduct the cost of some of their purchased assets in the first year, although certain assets, like real estate, do not apply to this tax savings. However, you can often qualify for depreciation deductions instead.
Equipment financing works similarly to traditional loans, but they fund faster and are less challenging to obtain. Acquiring funds in this way allows you to get all the items you need to run your company and create growth opportunities.