Equipment Loans and Leases

Equipment Loans and leases: Need equipment to expand and grow your business but can't get a traditional business loan? Equipment lenders and lessors offer better rates and terms without all of the hassle.

Overview:

All businesses need equipment, machinery and tools as well as other business or office equipment in the operation of their company.

Equipment can include large items like dry cleaning washers, construction backhoes and tractors, and CNC routing machines to office equipment like copy machines, fax machines, and computer and server hardware and software.

Businesses have several options in purchasing needed equipment.

First, businesses can use their cash on hand to purchase the equipment out right. While this provides several benefits in overall equipment costs, it also uses necessary business capital that can be used for other revenue growth opportunities like increasing sales and profits.

Second, companies can get an equipment loan - from a bank, financial institution, or other non-bank lender to purchase the equipment. This requires lower amounts of cash out of pocket but means regular monthly payments and interest charges as well as possible up front fees.

Third, businesses can lease the equipment. Leasing could mean no out of pocket expenses, tax benefits just like the other two options above and 100% financing including shipping and set up.

Although each business loan / equipment loan option above has its pros and cons, it is always best to leverage current cash flow to purchase an asset to be used in business - then let that assets, through your operations, pay for itself.

What this means is obtaining an equipment loan or equipment lease based on your business's current cash flow - purchase the equipment with little or no up front cash (cash that can be used to grow the business) - then use the equipment to generate more, profitable business.

In this type of scenario, the business uses very little of its capital on hand but still gets the equipment needed to grow sales and operate the business. Mostly, this type of scenario allows the business to use the equipment it is paying for to pay for itself through increased business or better profits.

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Equipment Loan:

With an equipment loan, some banks, financial institutions, or other lenders will finance (provide an equipment loan or lease) up to 100% of the purchase price - not including shipping, taxes and installation cost. However, most will lend on a minimum loan-to-value (LTV) of say 80% to 90% of the appraised (if used) or purchase price (if new) and require significant cash flow to cover the P & I payments.

However, paying 20% for a piece of business equipment is much better than paying 100% for the equipment, especially since the equipment itself could pay for the remaining 80% - saving the business' capital for other opportunities.

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Equipment Lease:

An equipment lease is a great way for growing businesses to acquire the equipment or machinery they need without paying full purchase price up front - keeping more needed cash in the business.

Thus, the equipment can be used in the operation of the business; allowing the business to generate additional revenue from the use of the equipment, without having to waste needed capital.

Further, some businesses may not qualify for an equipment loan but will qualify for an equipment lease.

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Advantages of an Equipment Lease:

These business loans have lower up front costs. No down payments or up front fees and usually 100% financing.

100% includes the purchase price, shipping, taxes, and installation.

Leasing payments can be lower than finance payments as a business can lease or finance a small portion of the equipment - not the full purchase price (does not amortize the residual value).

Equipment Leasing shifts risks to the lessor if the equipment looses value over time. Leasing can provide more flexibility to businesses who expects to grow over the immediate short-term. As the business grows, its equipment needs will grow. Thus, the business is not stuck with an asset that has no value to the business yet it is still paying for.

Lease payments are considered business expenses, which can be set off against revenue when calculating tax payments.

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Types of Equipment Leases:

Finance Lease - also termed capital lease - allows a business to finance the equipment without actually taking ownership of the asset. The business has control over the asset, its benefits and risks, but may not actually own the equipment until the end of the lease. The term of the lease is usually tied to the useful life or close to the useful life of the asset. Think rent to own.

Operating Lease - A lease where the term is much shorter than the useful life of the asset being leased. The business can acquire the asset for a short period, to be used in the business, then given back to the lessor. The remaining or residual value is held by the lessor.

Sale Lease Back - Let's not forget that business that already own equipment but need working capital for their businesses, can sell their equipment to a financing or leasing company for cash (cash that can be used in the business) then lease that equipment back from the leasing company at fixed monthly payment (just like a loan). Remember, this is a paper transaction - you don't have to take the equipment to the finance company. Sale lease backs are great ways to improve the cash flow of any business.

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