Equipment financing fully explained

By Izzy M
Modified on June 7, 2023
equipment financing

Opening a small business is an exciting process. Unfortunately, it can require a lot of expensive equipment pieces. Learn more about equipment financing and what you can do to qualify for an equipment loan today! 

Equipment Financing: Leasing vs. Buying

Are you thinking about starting a small business? You likely need several essential pieces of business equipment to start. So should you lease or buy your equipment? Learn the difference between equipment leasing and buying to make the best investment decision. 

Pros of Leasing Business Equipment 

Lower Upfront Costs

Getting an equipment lease can help you get access to several essential business devices. Leasing equipment can be more affordable than financing since the initial expense is typically lower. If you don’t have a lot of money to spend on business equipment, know the initial expenditures are minimal. 

Tax Deductible 

When tax time comes, your lease payments may be tax deductible. Lease payments can be deducted as a business expense on next year’s tax return. Tax deductions are highly beneficial for small business owners since they can reduce the net cost of your lease. 

Equipment Upgrades

If you eventually decide you want to upgrade any equipment, you can obtain higher-end equipment once your lease ends. Suppose you own a salon and lease basic styling chairs. Once your lease ends, you can upgrade to get mid-century modern chairs. Equipment leasing also tends to have more flexible qualification terms. 

Cons of Leasing Business Equipment 

Higher Costs in the Long Run

The downside of leasing equipment is that there is a higher overall cost. You are not paying to own the equipment when you lease business equipment. While the monthly payment may be low, you will inevitably pay more for renting business equipment over time due to interest fees. Depending on how high the interest rate is on your equipment loan, you could end up paying over a thousand dollars in interest. 

Leasing Agreements

Another con of leasing equipment is that you are stuck with the terms of the lease agreement. You must continue making monthly payments until the final payment date. Suppose you lease a heat press machine but decide to forego selling shirts on your online store. You will still have to continue paying to use the device or face costly early termination fees. 

Pros of Buying Business Equipment 

Equipment Ownership

The benefit of buying is that you will own the equipment. Every payment you make helps you earn more equity if you finance the equipment. Buying is incredibly beneficial for top-of-the-line equipment pieces that help improve productivity. Once you make the final loan payment, you have assets to your name. 

Tax Deductions on New Equipment

Buying equipment offers tax incentives for business owners. According to Section 179 of the Internal Revenue Code, you can deduct the total cost of qualifying new equipment pieces in the first year. If your small business financed $50,000 worth of eligible equipment, you could deduct the entire amount from your taxable income. 

Depreciation Deduction

All assets depreciate over time since use can lower their value. However, you may be able to get depreciation deductions for business equipment! Depreciation deductions can be beneficial if your business equipment doesn’t qualify for the Section 179 deduction. 

Cons of Buying Business Equipment 

Higher Upfront Cost

The downside is that buying equipment requires more financial capital upfront than leasing. For example, you may be able to lease an espresso machine for $30 a month, but buying a new commercial machine can cost upwards of a thousand dollars! 

You are subject to credit approval if you decide to use an installment loan to finance the cost of buying new or used equipment. Lenders will consider your credit score, income, payment history, etc. Suppose your personal credit score is less than perfect. In that case, you may not get a substantial loan amount or affordable interest rates. 

Outgrowing Equipment

One risk of buying equipment is that you can outgrow it. For example, you may purchase a top-of-the-line POS system, but that technology may become obsolete in a few short years. The worst part is that some business equipment pieces have low resale value, so you may not get even half as much money as you put in. 

What Is an Equipment Loan?

Equipment financing is a type of asset-based financing. Financing allows you to get the specialty equipment you need to run your small business and pay off the high cost through monthly installments. An equipment loan is ideal for small business owners that need essential equipment pieces but don’t have a lump sum to pay upfront. 

An equipment loan is a type of secured loan since the business equipment is used as collateral. When you get approval for equipment loans, you will typically have to sign an Equipment Financing Agreement (EFA). In the event a borrower falls behind on loan payments, equipment financing companies can repossess the equipment to recoup funds. 

Small business equipment loans can provide thousands of dollars to small business owners who need money for various equipment pieces. The cost of borrowing will vary per lender and the terms of your loan. Interest rates vary greatly, typically from 8% to 30%. Equipment loan terms depend on your credit score, business background, income, etc. 

While equipment loans are typically easier to get than a business loan, there are drawbacks. One downside of equipment loans is that many financial institutions will only pay 80% to 90% of the cost of the business equipment. That means you will have to provide 10% to 20% of the price on your own. If you get an equipment loan to buy a $15,000 commercial convection oven, you will have to provide at least a $1,500 down payment. 

Alternative Equipment Financing Options

Suppose you need business equipment to get your small business off the ground. In that case, you may consider applying for an equipment loan. However, a down payment requirement can put off many small business owners who can’t spare the high cost. If you need money, know there are alternative loan options to afford the high cost of essential equipment pieces. 

Personal Loan

A personal loan is a short to long-term installment option. Using personal loans for business equipment means there is no down payment. If you get loan approval, your lender will provide a lump sum. 

A convenient benefit of personal loans is that you can use your loan money on just about anything! There are no spending restrictions. You can buy a security system, shipping supplies, software, etc. Loan amounts range greatly, so you can get as little or as much as you need. 

Eligibility for personal loans depends mainly on your credit score and income. If you have bad credit, rest easy knowing there are online no credit check loans. You can avoid the damaging effects of a hard credit inquiry. 

Business Loan

Many small business owners struggle to decide between a personal loan and a business loan. Business loans are typically more challenging for consumers to qualify for than personal loans. Still, they can offer a lot more money. Depending on your business background, you could get as much as $500,000!

To qualify for a business loan from a bank or credit union, you need to provide a lot of information. Most lenders will require your credit history, annual revenue, years in business, business plan, and more. A business plan is a detailed document that states your business goals, services, and finances. You must include financial projections and outline your future business plans. 

Line of Credit

Many people get lines of credit for personal expenses. But you can get a business line of credit to finance business equipment! Lines of credit work like credit cards, but they typically offer lower APR and higher credit limits. You can use credit checks or electronic transfers to access a line of credit.

To open a line of credit, you need to have a good credit score. Lines of credit typically have stricter qualification requirements than credit cards. If your credit score is not higher than 670, you may not qualify for a business line of credit. 

The Bottom Line 

Are you wondering how to open a small business with less-than-perfect credit? If you need money to buy new or pre-owned equipment, consider financing! Business owners can choose to purchase or lease the essential equipment pieces they need to keep their business running. The best option depends on how much money you want to invest and if you want to keep the equipment. 

Certain pieces of business equipment can become outdated within a few years, so it may be better to lease. Leasing allows you to use equipment temporarily. Once the lease ends, you can upgrade or buy different equipment. But it makes sense to buy if you intend to use the equipment for long periods and know the item won’t become outdated quickly. 

Equipment financing can help prospective business owners get their ideas off the ground and start working for themselves. There are plenty of loan options available, whether you want to lease or buy business equipment. Just ensure you explore all avenues before locking yourself into a financial contract.

Business Equipment: Buying vs. Leasing│Nolo
What Is Equipment Financing & How Does It Work?│Merchant Maverick

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