The best equipment financing option may not be suitable for your business as it may suitable for another.
Starting a business requires a number of things, equipment being a major aspect. Equipment acts as an asset of the business and is therefore the most important tool any business can have. You may however wonder which option works best. Should you lease equipment or get a loan to buy one?
The type of business you have and the financing method available are the two key factors that will determine which equipment acquisition option suitable for you. A lease versus a loan.Which one is easier to apply for? To understand this subject better, take a look at the options and requirements that accompany each of these financing choices.
How To Choose The Best Equipment Financing Option
With an equipment lease no down payment is required during the lease agreement. What is financed is the value of the equipment which is expected to depreciate during the lease term. And as a lessee you also have the option to buy the equipment at its remaining value when the term of the lease expires.
Under this method of financing, the lender will require you to invest a down payment in the equipment you want. You will then use the loan given to finance the remaining amount.
Under this arrangement all that is needed as collateral is the same equipment used to secure the lease transaction.
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The lease arrangement differs with a loan whereby you will be required by the lender to pledge other assets as collateral.
Here there are no restrictive terms that limit your ability to borrow more funds. As long as you adhere to the terms and conditions of the leasing agreement, the lessor cannot interfere with your usage of the equipment. In addition, the lessor is not in a position to demand full settlement of the outstanding lease payments.
With a loan agreement you are however restricted by certain covenants that limit your ability to borrow more funds. The lender requires that you maintain certain financial ratios before you can secure additional funds. The lender has a right to demand full payments of the loan amount if you violate certain terms and conditions in the agreement. Even if you have been remitting payments in time, you will have to comply with the lender’s directives.
In a lease arrangement, you will be required to remit a single payment at the beginning of the first payment period you agreed upon. The payments will however be more compared to the initial down payment.
A loan on the other hand requires two payments during the first repayment period. Apart from the down payment you made earlier you will also have to repay the loan at the end too.
Risk Of Obsolescence
Since you are under no obligation to own the equipment when the lease term ends, the risk of obsolescence is transferred to the lessor.
If you opt for a loan financing, you will have to bear the risk of equipment devaluation caused by changes in the market or new technology.
When it comes to tax issues, you can use the entire lease payment as tax deductions. The tax deductions will however be more if there is considerable depreciation. This occurs if the equipment write-off payment is tied to the lease term. The deductions are the same each year and you will consequently know what your business has to remits as taxes annually. Note that most equipment financed through conditional sale lease is usually treated as owned equipment.
Under a loan financing, you may claim tax deduction for a portion of the loan payment as interest and for depreciation as well.
Changes In Cash Flows
There will be more cash flow later in the lease term especially with the option to buy the equipment. At this time inflation will make the dollar cheaper.
With a loan you will pay a big portion of the financial obligation using the current inflated values.
A lease versus a loan.Which one is easier to apply for? To answer this question the elements highlighted above clearly indicate that loan financing method has many requirements and is also risky. The term of lease agreement are much suitable and puts you under no financial strain.