Equipment Loan Vs Equipment Lease; Which Is Better?

Whether to apply for an equipment loan or an equipment lease is a dilemma that business owners face. Equipment loans have their pros and cons but so do equipment leases.

equipment loans vs. equipment leasingStarting a business or even expanding it requires a great deal of financial investment and in some cases, you might need to acquire a large amount of equipment to help run your business. When this is the case, the option of taking an equipment loan vs. an equipment lease can pose quite a dilemma to many business owners.

An equipment loan is similar to the traditional business loan. You have to apply for the loan amount that you want from a bank although businesses can acquire business loans from other institutions such as credit unions, so they are not limited to just banks. Borrowing money introduces a company to another level of risk. The interest rates can be quite high and the amount of funding that a business qualifies for may not even be enough for it to operate smoothly. The good news is that banks do not take ownership position in businesses.

When it comes to leasing equipment, a leasing company will make a cash purchase on the equipment and then lease it out to you. A line of credit is usually much more difficult to obtain as compared to a lease. Most of the time, leases of up to $100, 000 can be obtained with little documentation.

Equipment Loan Vs Equipment Lease; Which Is Better?

A lease does not require a down payment. The lease only finances the equipment’s value, which is expected to lessen during the lease term. At the end of the lease, you have the option of purchasing the equipment or simply returning it. With an equipment loan, you have to invest a down payment and the loan will finance the remaining amount.

An equipment loan requires you to provide security by using other assets as collateral. This could be your house, your car, or anything that is equal in value to the amount that you are borrowing. A lease on the other hand, uses the leased equipment as security for the lease transaction.

When you enter into a lease agreement, you can still borrow other funds provided you are current with the terms and conditions of the lease. Your leasing company does not have a right to interfere with the use of your equipment or demand full payment of the outstanding lease payments. A loan agreement has restrictive covenants and may actually prohibit you from borrowing future funds. If you violate one or more of the covenants, the bank has a right to full payment of the outstanding balance even if the loan payments have been made on time.

An operating lease can improve your financial ratios because it does not require leased assets to appear on the balance sheet. Your leased equipment will therefore be considered as an expense. However, when you take an equipment loan, Financial Accounting Standards require equipment owned to appear on the balance sheet as an asset.

When you take out a business loan to finance your equipment, you will have to bear the risk of being stuck with outdated equipment. However, when you lease equipment such as medical equipment, you transfer all risk of obsolescence to the leasing company.

You can claim the entire lease payment as tax deduction if your lease is structured as a true lease. With an equipment loan, you can claim tax deduction for only a portion of the payments as interest. What’s more is that depreciation is tied to IRS depreciation schedules.

Conclusion For Equipment Loan Vs. Equipment Leasing

Considering the above facts, it is only right to conclude that equipment leasing is a much better option to equipment loans when you need to finance business equipment. Leasing has tax benefits, it is much easier to obtain and does not require you to have collateral. Loans on the other hand are much more difficult to acquire. Banks usually lend money to businesses based on the value of the business and its ability to service the loan. You have to give collateral and show a good track record of paying back loans. Therefore, if you have a bad credit history, you have a higher chance of being denied a loan. This does not conclusively say that equipment leasing is the only way of financing a business but it is definitely one of the most flexible means.

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