Wondering If Your Business Should Take An Equipment Loan or Lease?

If you have been in business for any amount of time, then you understand that holding on to your own cash is a must for your business survival.

Keeping cash on hand to take advantage of new opportunities, to service that new, big customer or to meet payroll and other liabilities should your business have a slow period.

Thus, when it comes to buying new equipment for your business - be it tools and machinery or computers and fax machines - do you use your own cash or do you finance?

If you feel that your business can part with some of its own cash, then by all means as this will be your cheapest method to acquire that needed equipment. But, if you do decide to finance, what method is best for your business?

Both - loans and leases - will get you the equipment your business needs. Both offer their own pros and cons. And, both, in this day and age, are hard to get.

Thus, when deciding to finance, always look for the method that offers the least overall cost to your business - provided that the benefits are comparable.

Let's look at a few of the factors to consider when deciding between an equipment loan or lease:

1. Many businesses shy away from equipment leases because when the lease is up they have nothing left (having to give back the equipment).

   But, do know that most equipment has a limited useful life. Banks and other equipment lenders know this and thus set their term based on that useful life. Therefore, regardless of whether you lease or take out a loan, the equipment might not have that much value at the end of its term anyway.

   Further, new technology or new innovations tends to render most equipment obsolete in just a few years. So, if you have to keep upgrading your equipment to stay competitive, having something left over at the end of a lease or the end of your loan term is a moot point.

2. Rates and Fees: Most business loan rates float based on the market or are tied to the Prime Rate or Libor index - which can make your payments change without much notice.

   Most lease rates are fixed over the term of the agreement - keeping your payments the same no matter what happens in the market.

   However, bank loan rates can be lower than lease rates especially if interest rates, in general, are falling.

   Both loans and leases usually have some type of fees associated with them. Thus, your business will pay these regardless. You have to compare these fees on their own merits as well as in terms of the overall cost of financing.

3. Term: Bank loan terms are normally set by the bank or lender's policy; where lease terms are a bit more flexible - allowing your business to shorten or lengthen the term to match your needs.

   If you plan to upgrade, a shorter lease might provide added benefit to your business over the long-run. However, with an equipment loan, you can always pay down or pay back the loan faster which can be managed to provide similar benefits - giving your business some value to batter with when it is time to upgrade.

4. Loan or Lease Amount: Leasing companies will usually finance 100% of the deal to include shipping, installation, training and sales tax - a real benefit. But, do know that financing these additional items will add further cost to your business as the leasing company will still expect some form of interest for paying those fees up front.

   Bank loans, on the other hand, will usually require the business owner to put something down against the purchase price and tend not to cover those other direct costs.

5. Type of Collateral: Most non-bank loan or leasing companies will finance nearly any business equipment. Equipment financing is their business thus they don't want to limit themselves.

   Banks that provide equipment loans tend to have a very narrow selection of the type of equipment they will finance. Banks will not finance specialty equipment or equipment that has limited use. The reason is that should they have to take that equipment back for non-payment, they want to be able to sell it quickly.

   Further, banks, unlike equipment leasing companies, will require additional collateral or will file a UCC-1 against your entire business; requiring you to put more of your business assets at risk.

Deciding whether to lease or take out a loan is an individual business decision and no one person can make a single rule for all businesses.

There use to be an old saying that if an asset increases in value, you should buy it and if it decreases in value you should lease it.

But, in actuality, it really all comes down to costs and benefits.

The goal here, as it is with any business decision, it is get the biggest bang for your buck.

If the equipment you need costs X (regardless if you lease it or not) - then the benefit you get from that equipment should be X plus - meaning that you get more (much more) benefit out of the piece of equipment than that equipment cost.

So, if you are wondering if your business should take an equipment loan or lease, look to the benefits that equipment will provide your business then find the cheapest way (over the short- and loan-term) to purchase or finance that equipment.

It is really that simple!

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