Equipment Loan Verses Equipment Lease

So, what is better for a business seeking to acquire equipment for their company - an equipment loan or an equipment lease?

Many business owners, when deciding to obtain equipment (be it office equipment or machinery and tools for operations) get inundated with many financial options between actually taking a fully amortizing loan to purchase the needed equipment or leasing that same equipment for 1, 2, 3 or more years.

Further, there is an ongoing debate on which is financially better for your company in the long-run.

When I was in graduate school, I was told that if the item appreciates, you should purchase it - meaning taking a loan to buy it if you don't have the cash on hand - and if it depreciates, lease it - regardless if you have the cash on hand to purchase it outright.

Other arguments are thus:

Leasing usually shifts much of the financial cost to a later time frame. Taking a loan usually requires a 20% or more in an upfront down payment as well as having more of your monthly payment going to interest earlier in the contract (think time value of money) while leasing places much of the value and cost at the end of the lease.

Purchasing (usually by taking a loan) gives the owner more control over the asset as well as allows the owners to recoup any value should they decide to sale the equipment in the future (recovering some of that initial cost). Or, that the useful life of the equipment may extend well beyond its lease life providing your company much more long-term benefit.

100% of lease payments can usually (depending on structure) be written off against income while only interest payments on loans can be used to reduce taxable income - depreciation is another issue.

Equipment loans can makes a business's or business owner's debt ratios look worse should that business need additional outside capital in the future.

All of these are extremely valid augments and the answers to them for your particular business are usually based on your specific business and situation.

However, in my opinion, none of that really matters for a new or growing small business.

Usually, when a business is just getting off the ground or is growing rapidly (and burning a lot of cash to fuel that growth) the subtleties of loans or leases just really does not matter all that much. What matters more is simply getting the equipment and moving forward in making more revenue (which can be used to pay for the asset) and ultimately more profits (as that is the final goal anyway).

Thus, it really comes down to two items for a new or growing small business on whether it should take an equipment loan or an equipment lease:

1) Cash on hand. If you don't have the cash on hand to pay to 20% or more down payment (equity) then you just might not qualify for an equipment loan to begin with. Thus, take the lease and move forward with your business. Then, after your business has reach that comfortable level of success, you can waste time pondering what is actually better for your business at that time.

2) What you can get. If you don't qualify for a business or equipment loan then your only option is to lease or visa versa. You might not qualify for a lease but, if you can scrape together the down payment, you might get the loan you need.

There are some very strong, financial arguments for when a business should take a loan or lease when purchasing equipment. But, these usually depend on your particular situation and for many small businesses this argument just tend to get in the way (making you over think these scenarios).

Our suggestion: Go with your gut, make the deal and move forward and don't be over pressured by someone trying to sell you their loan or lease product - something that probably benefits them much more than you.

advertisement

Copyright 2007 - 2012 - Business Money Today - All rights reserved