When leasing is used for construction equipment financing, there’s always a chance that you might save money as well as enjoy some tax benefits.
Construction equipment financing is basically financing any piece of construction equipment that you can utilize to help your business generate income. Provided the repayment of your equipment can be claimed as a business expense then it can be financed.
There are many ways that you can finance your construction equipment. Below are two of the most common ways of obtaining construction equipment financing.
Construction Equipment Financing Options
An equipment loan is essentially money borrowed to purchase construction equipment. You can acquire a loan from a bank or any other lending institution.
An equipment lease is a contract between you and your equipment lessor that allows you to use their equipment for a certain period of time and in exchange, you will make fixed monthly payments. The terms and length of an equipment lease can vary according to your business needs.
Equipment Loan Vs. Equipment Lease
When it comes to construction equipment financing, you have to be able to choose a plan that will save you money and at the same time, help you run your business smoothly. You can do this by carefully analyzing the pros and cons of each method of financing.
Pros And Cons Of An Equipment Loan
With a construction equipment loan, ownership of the equipment is transferred to you upon delivery. The bank or lending facility you choose to get your loan from gives you 100% financing.
You can enjoy tax benefits if the equipment that you finance will be used to generate accessible income. Since ownership of the equipment is automatically transferred to you, depreciation can be claimed as a legitimate business expense.
One of the disadvantages of choosing an equipment loan as an option for construction equipment financing is that you will need to make a down payment, which can be almost impossible if your business is a start up.
Secondly, you need to have a good credit score. Most lending institutions use your credit score to determine if you can repay your loan in full and in a timely manner. If you have a damaged credit score, there is a high chance that you might not be approved for a loan.
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Another disadvantage of getting an equipment loan is that you will have less flexible payment schedules and you will have to adhere to strict covenants. For instance, you cannot borrow more money to run your business if you still haven’t finished repaying your equipment loan.
Other risks that come with equipment loans is that you stand a chance of damaging your credit score if you do not repay your loan on time, you get less tax benefits and you have to provide collateral that equals the amount you are borrowing.
Pros And Cons Of An Equipment Lease
One advantage of considering an equipment lease as an option for construction equipment financing is that you do not need to make any down payments or provide any form of collateral. Even if you are required to pay a down payment, it is not as significant as the amount you will be required to pay when you take out a loan.
You also get to enjoy tax benefits and flexible payments. Leasing does not come with strict covenants. You can still borrow money to run other activities in your company. Moreover, you do not need to have a perfect credit score in order for you to qualify for a lease. Many equipment leasing companies have programs specially designed for lessees with damaged credit scores.
Equipment leasing comes with certain disadvantages such as ownership of the equipment remains with the lessor so you will be paying for equipment that you may never get to own. Fortunately, there is a solution for this. You can negotiate with your lessor to draft an agreement that will allow you to purchase the equipment at the end of your leasing period.
Make A Decision
Of the two construction equipment financing options, leasing is the best for a business that is just starting out and is operating on a tight budget. It has less restrictive terms and allows you to utilize state-of-the-art equipment that might otherwise be expensive to acquire.
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