When getting new equipment for your business, one of the things that you may want to consider is if you want financed or leased equipment.
If you are in a situation where you need new equipment, there are strings of options that you can choose from. If making a cash purchase is not a good option for you, you have two options; leased equipment or financed equipment. Financing equipment is to borrow money to purchase your equipment. You will be responsible for making monthly payments to your lender. Leasing equipment is whereby you borrow the car and make regular payments to your lessor. These two options have some other differences, which might also qualify as pros and cons.
Difference Between Leased Equipment And Financed Equipment
If you prefer leased equipment, then you should know that in most cases, you will not be required to make a down payment. The amount that you agree to pay in terms of monthly installments covers other costs such as training, installation, shipping and so on. Financing, on the other hand, will require you to make a down payment of 20% or more, of the total cost of equipment. The loan that you take will finance the remaining amount.
You can acquire leased equipment without providing security, as is usually the case when you decide to go with loan financing. Your leased equipment is the only security that you need to get approved for a lease. You do not need compensating balances. Ownership of the equipment remains with the lessor. Once your lease term ends, you can decide to return the equipment, renew the lease or purchase the equipment at $1, at 10% the initial price or at fair market value. When you decide to get a loan to finance your equipment, you will be asked to produce collateral. In most cases, borrowers produce real estate as collateral. In addition to the loan, you may need compensatory balances. Ownership of the equipment that you purchase with the loan is transferred to you.
Leasing equipment does not include any restrictive covenants. For instance, you can still borrow money from any institution while still making your monthly payments. Your lessor won’t care how you conduct your business provided you hold up your end of the deal as you had agreed when you signed the lease agreement. When you borrow a loan to finance you equipment on the other hand, you will be bound by restrictive covenants. You will not be able to borrow money for other operations in your business.
With leased equipment, your leasing company will normally have a fixed payment schedule whereby you are required to make fixed lease payments every month. This way, you can predict future cash flows for future expenditures. When you apply for a loan, on the other hand, the interest rates may fluctuate every month depending on the current financial market. This without a doubt makes it difficult to predict future cash flow.
Applying for a lease and getting approved generally takes 24 hours. The process is very simple. For instance, a lease of up to $200, 000 can be approved within 24 hours while any amount higher than that can be approved within 5-7 business days. The application process for a loan is rather long and complicated. Extensive documentation has to be included such as personal guarantees, board resolution, promissory note, master loan agreement, among other things. Depending on the amount of money you have requested to borrow, it may take up to one month or more to be approved.
Bottom Line
In short, when deciding between leased equipment and financed equipment, you have to factor in a few things. For instance, what are your chances of being approved for either of them? Would it be much easier for you to be approved for a lease as opposed to a loan or vice versa? In order for you to get a loan you need to have a good credit score, collateral and a sure way of repaying the loan within the given time period. You must be ready for fluctuations in interest rates. What’s the worst that could happen if you do not repay your bank loan? For starters, your credit score will go down and you may have to auction your equipment to come up with the money to pay back the loan. When you are unable to make monthly lease payments, your credit score will not be affected and the lessor will simply take back their equipment.
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