Entrepreneurship | Money

Equipment Financing And Equipment Leasing: How Do These Two Financial Instruments Work?

To be able to understand the terms of equipment financing and equipment leasing, first, it’s essential to perceive what is considered equipment. In terms of the law, any tangible asset other than a building or a property used in a business’s operation can be considered as business equipment. For instance, business equipment could be a bread oven in a bakery, desks for a new office, or an enormous drilling machine owned by a construction company.

equipment leasing - equipment financing - environment - machine
via Anamul Rezwan from Pexels 

Many companies that need new equipment opt to finance the acquisition of expensive equipment to spread the cost over the asset’s useful life, making the investment more accessible. As a matter of fact, the Equipment Leasing and Financing Association found that 78% of U.S. businesses across all industries rely on financing equipment purchases through loans, leases, and different lines of credit. Besides, on many occasions, companies choose to finance the purchase of new equipment to liberate capital to invest in additional areas of the company’s work field. Consequently, equipment financing can be a handy tool for companies of all sizes.

There are two convenient financial options for companies looking to finance new equipment:

  • Equipment financing 
  • Equipment leasing 

We’ve compiled this article to help you find out how these two financial instruments work for companies and determine which one will make the most sense for your business needs.

Equipment Financing

What Is Equipment Financing?

Equipment financing refers to a loan exploited to acquire business-related equipment, such as copier scanners and computers, vehicles, bar stools,  etc. Equipment financing provides for repeated payments that include principal and interest over a fixed term. As security for the equipment financing, the lender usually requires a lien on the equipment as collateral as opposed to the debt.

Once the loaned finances are paid in full, this financial instrument’s user will own the equipment free of any lien. The equipment financing loans structure varies, but usually imposes a lien upon additional business assets or requires a personal guarantee. The failure to pay your loan to the lender may result in your business or personal assets’ repossession depending on the contract. Always make sure to carefully review the equipment financing terms to understand your risks beforehand.

How Can You Obtain Equipment Financing?

These equipment loans can be obtained from various sources, depending upon your creditworthiness and the nature of the equipment you want to acquire. These sources include: 

  • Commercial banks 
  • Credit unions 
  • Online lenders 
  • Equipment financiers 

Highly depending upon the nature of your desired equipment, sometimes, the equipment itself can collateralize the loan. And depending upon its type and cost, equipment financing loans can sometimes be for smaller amounts than a typical bank loan.

The terms for these equipment loans greatly vary depending upon the individual lender. In Canada, commercial loan repayment terms tend to max out at seven years for most loans with variable interest rates, depending on the lender, the credit profile, and the loan amount. 

As with most loans, the interest in equipment financing is a tax-deductible category. In case you want to obtain this type of loan through a credit union, you should know that to qualify for a loan at the credit union, you have to be a member of it to apply. 

Suppose you’re not a fan of commercial banks, credit unions and want to get your financing as quickly as possible. In that case, you should turn your attention to online lenders and financiers that offer financial packages on fantastic terms suited to your desired equipment. Trustworthy and highly reliable equipment financing Canada-based online lenders are slowly but surely revolutionizing the market of equipment financing for the better as they offer multiple financing options to their clients, require no down payment on most deals, and approve the credit lines within 24 hours.

equipment leasing - equipment financing - factory
via Pixabay

Equipment Leasing

What Is Equipment Leasing?

You can say that leasing is very similar to borrowing. However, in a lease, the lender acquires the needed equipment and then leases or rents it back to you for a flat monthly compensation that is sometimes even lower than the regular loan payment. Most equipment leases come with an established interest rate and fixed terms, but they can fluctuate depending on the leasing company and your credit profile

The terms can vary anywhere from high single digits to double digits, so always check different leasing options before you finally commit. When the lease ends, you might purchase the equipment at fair market value or a predetermined amount depending on the lease.

How Does Equipment Leasing Work?

First of all, numerous equipment vendors offer leasing equipment through an in-house leasing department or work with leasing companies they recommend during the purchase. On the other hand, online lenders and financing companies have simplified the leasing process in recent years as they can purchase the equipment outright and lease it back to you for a set term. Other options include leasing companies, leasing brokers, and independent lessors. 

Equipment leasing differs from equipment financing so that it won’t appear on your credit report as a loan. Besides, standard lease terms often include up to ten years, and your lease payments might be deductible as business expenses. Nevertheless, even though the lease wouldn’t appear on your credit profile as a loan, your monthly installments will probably be reflected on your business credit profile the same as any other revolving debt.

leasing - agreement
via Shutterstock

What Type Of Equipment Makes Sense To Lease Instead Of Purchase?

Even though there are no strict rules regarding what type of equipment is better suited to lease versus buying, there are particular types of equipment and machinery that make more sense for a lease, because of their generally shorter usable life and include: 

  • Software and high-tech computers 
  • Medical and lab equipment 
  • Equipment that gets easily damaged
  • Vehicles and other transport solutions

Final Thoughts

It doesn’t matter if you’re just getting started or you’re a firmly established business operating for many years, if you’re trying to stay relevant on the market and gain a competitive edge over your rivals, you’re going to need new equipment sooner rather than later. When the time comes, whether you decide to lease it or purchase it, make sure to thoroughly understand the costs and terms that come with the financial instrument you plan on using before you make the purchase official.

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