Small businesses make up a surprisingly large part of the American job force. Defined as those employing fewer than 500 people, small businesses provide half of the American workforce, and there are 543,000 new ones opening every month. Small businesses often are confronted with financial challenges that can only be solved by banks and alternative lenders. About 16% of the nation’s loans are used solely for business purposes, and 23% of those business loans go to companies experiencing slow sales.
Another popular reason many small businesses take out loans is the purchase of new equipment. Business equipment loans are quite common, largely because much of the equipment required by small businesses is so expensive. Here, we will look at the benefits and issues surrounding business equipment loans as compared to business equipment leases.
Why Buy Business Equipment?
Buying might be a good option if there is an expectation that the equipment will have a long, useful life without replacement or upgrade. Buyers gain equity in the equipment and often benefit from financial advantages like depreciation and tax deductions. Heavy equipment loans and business equipment loans are usually available in amounts of at least $25,000 and are secured by the equipment being purchased.
Buying vs. Leasing
- Down payment: Buyers usually need to provide a down payment between 10% and 20%. Leases rarely require down payments.
- Ownership: Buyers have ownership of equipment from the start of the term. Leasers have options at the end of the term, including assuming ownership or purchasing for $1 or fair market value.
- Taxes: Buyers are often eligible for depreciation deduction and full cost deductions under Section 179 of the Internal Revenue Code. Leasers can often deduct their payments under Section 179 as well.
- Upgrades: Buyers are sometimes confronted with low resale value or early obsolescence of their equipment. Leasers often have an easier time of replacing equipment that’s become obsolete when their leases expire.
Choosing to purchase equipment is a big decision, but it might be the right one for your business. If you’re looking to obtain the type of equipment that boasts a long life and experiences few upgrades, a business equipment loan might be the right option for you.