What is the difference between small business equipment loans and equipment leasing? Which one is better for my business?
Well, for starters, small business equipment loans are designed to get you the funding to get your business started. When you take out small business equipment loans, you're essentially borrowing money so you can get the equipment your business needs to run. Examples of this might include the kitchen equipment necessary in a restaurant, or the machinery in a factory. It's how you get the money to start your business.
Equipment leasing, on the other hand, is not designed to buy you the machinery or equipment you need. With equipment leasing, you're looking at a way to use that equipment without having to buy it. You're leasing it, just like you would lease a car. Instead of owning the equipment, like in small business equipment loans, you're just borrowing it, often on corporate credit. It's like a long-term rental, where you're paying so much per month for the chance to use that equipment. It still allows you to use the equipment, but you'll be paying less, and you'll be paying as long as you have the equipment.
So what kind of system should my company use? Is there a specific reason I might choose equipment loans over equipment leasing, or vice versa?
It depends what kind of business you have. If you've got a business that has a high obsolescence (the rate at which your equipment becomes obsolete,) you might want to go with equipment leasing. Examples of this might be a business that's involved in computers, new technology, or medical equipment. If you need any of this kind of equipment, you probably don't want to take out an equipment loan to pay for it new, because as soon as you've paid off that loan, you know your equipment will already be out of date. If you've got a less state-of-the-art business, however, like a furniture store, you're not going to need to be quite on the cutting edge. You can still put a sofa together with an old machine, as long as it's a working machine. In cases like these, you might want to take out an equipment loan, rather than leasing the equipment.
The greatest advantage of equipment loans is that you only have to pay for the equipment once. While you may still have to pay for routine maintenance on some of the equipment you have, you aren't going to need to make monthly payments on your equipment once you've paid off that loan. With leasing, you'll be paying for the equipment as long as you have it, but with a loan, you can keep that equipment for as long as you want after you've paid for it. You'll still have to pay more for it initially, but it can be a much better investment long-term because it begins to pay for itself over time.
One disadvantage of taking out equipment loans is that it requires more money in the first place. While you may be able to find a good equipment loan, especially as you're just starting a business, it's much easier to find a lender who's willing to put up the money for equipment leasing. This is largely because equipment leasing is much cheaper for each contract, which means your lender won't have to risk as much money all at once. When you take out an equipment loan, your lender has to dish out a lot of money for it, and you're going to have to have a good credit history to convince your lender that it's worth that risk.
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