Equipment financing has been considered a risky venture, but when used correctly it can be a great asset to any business. While there are many aspects to equipment financing that you need to consider prior to making a decision, the financing process itself is relatively straightforward. First, you have to decide which form of financing to pursue: leasing or financing. Both have their own benefits and drawbacks. The easiest way to determine which is right for you is to consider your business’ financial position and goals. The business equipment financing process consists of three steps: 1. Examine the market for your equipment: This first step is to assess the market for your equipment. This includes the availability of financing and the number of lenders that are willing to provide financing.
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What Is Leasing?
Leasing has a larger upfront capital outlay than financing. Because of this, you may need to have a larger number of cash reserves for your leasing needs. You have to look for the future value of your equipment, as you cannot determine how much your equipment will be worth when it is paid off. In a sale and lease back transaction, an asset formerly owned by the seller is sold to someone else and then leased back to the initial owner for an extended period of time. In this manner, a business owner might continue to use a critical asset yet not own it.
What Is An Operating Lease?
So what is an operating lease? Operating leases provide the opportunity to purchase the equipment at the end of the lease term for the agreed-upon purchase price. This is often referred to as a ‘Buy-Out’ clause, where the business owner is able to purchase the equipment for the lesser of the purchase price or the remaining balance on the lease. This allows for strategic purchasing of equipment when the purchase price is lower.
What Is Medical Equipment Leasing?
Medical equipment leasing is a structured, pre-negotiated, contract-based type of financing that pays for equipment over a period of time at a set interest rate. The equipment is paid off at the end of the term by the borrower making a lump sum payment. Medical equipment leasing is offered through the trade. Medical equipment leasing is a personal loan that allows you to pay back the loan over time.
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Tips To Master The Art Of Business Equipment Financing
- One of the factors to consider when deciding which form of equipment financing is best for your business is the rate of a technology upgrade. Over time, equipment will become outdated and inefficient. This will require your business to upgrade its technology, which will require you to incur additional costs. Typically, equipment is upgraded faster with financing than with leasing. In the case of Aviation finance, your credit score has to be very good.
- One of the primary reasons for leasing equipment over financing is the ability to deduct the full cost of the equipment at the time the equipment is purchased. This allows the owner to defer paying taxes and avoid the hassle of filing false IRS forms. Leasing is a more favorable tax structure than financing. When leasing equipment, your business will have a tax deduction equal to the lesser of the fair market value (FMV) of the equipment or the amount of the down payment, in most cases.
- Service providers who market to small business owners enjoy an important competitive advantage over their larger competitors because they have demonstrated continuing support for their small businesses and local communities, which benefits them in the minds of their customers. Liability for customer service issues that you may encounter from third parties, including service providers, credit card companies, bill collectors, collection agencies, and others. This arrangement allows you to retain full control over your relationship with the third parties and allows you to transfer your liability to the provider of the third-party service in the event that your business experiences financial hardship.
- For individuals, personal loans are a great way to borrow money for unexpected expenses or to pay down debt. For small businesses, the terms and conditions range from very competitive to super competitive. However, these rates usually are higher than standard lending rates to take advantage of the lower costs to the lender. When comparing competing loan rates, consider the following factors: annual percentage rate, fees, term, and availability of funds.
- There is a financial lease with a buyout clause and an operational lease with no ownership but the ability to utilize equipment as needed throughout the lease term. Before making a strategic decision for your company, thoroughly research both choices. Every manufacturing entity’s lifeline is its equipment and machinery. It is critical to read, inquire about, and comprehend all covenants and restrictions pertaining to asset ownership at the conclusion of the lease term. At Tata Capital, we make it a point to give transparency to all of our customers from the start, so they can be confident in the investments they’re making to ensure their future.
- Maintenance and insurance are required for all machines during their life cycle. Small businesses that partner with lenders that have great relationships with OEMs and insurance firms benefit from integrated solutions that protect their equipment and investment. In-house financing may be available from equipment dealers. However, for a business owner seeking a higher return on investment, it may be worthwhile to explore the role of experienced financial firms, which are better positioned to provide priceless knowledge and better bargains.
Conclusion
Most entrepreneurs who wish to boost production and develop their firm must invest in equipment. Nonetheless, many business owners are hesitant to invest in equipment, whether it be machinery, commercial cars, or computers.