Business loans are about as common in the small business world as casual Fridays. U.S. small businesses, defined as those having fewer than 500 employees, were granted 800,000 business loans in 2011 and were denied 600,000. A survey of businesses taking out loans in 2012 revealed three major reasons for application: cash flow, reserve or cushion funds, and inventory purchase.
Nearly every small business needs some type of equipment to operate appropriately. Whether it’s computers, desks, machinery, tools, or trucks, a small business won’t get far without the equipment it needs to function on a day-to-day basis. For many, however, there isn’t much chance of purchasing equipment without some type of loan, at least without tying up important business capital. Besides paying for equipment out of pocket, there are two other options: business equipment loans and business equipment leases.
Business Equipment Loans vs. Leases
Making the decision between an equipment loan and an equipment lease is no easy task. The most important first step is to understand each.
Business Equipment Leases help many businesses meet their purchase needs. They require no out-of-pocket expenses, receive 100% financing, involve low monthly payments, and still afford businesses the opportunity to purchase equipment at the end of the lease term. Other benefits include
- No down-payments or upfront fees, and usually 100% financing.
- No effect on business when equipment loses value over time.
- Lease payments can be tax write-offs.
Business Equipment Loans come from banks, financial institutions, and other non-bank lenders. They sometimes offer 100% financing, though such an option may require cash out of pocket.Businesses make regular monthly payments with interest until the loan and its fees are paid in full. Benefits include
- An average of 80% to 90% financing.
- Payment of only 20% of equipment cost.
- Equipment held as loan security.
- Flexible options for repayment.
- Low fixed interest equipment loan rates.
- Eventual business ownership of the equipment.
How to Get a Business Equipment Loan or Lease
- Choose the equipment you are looking to purchase.
- Decide between a loan and a lease.
- Contact a lender and submit and application.
- Negotiate the terms and conditions of the contract.
- Sign the contract and set up a payment schedule.
Both business equipment loans and leases have benefits and drawbacks. Consider your company’s situation carefully and spend time understanding both options before making your financing choice.