When a business needs to purchase necessary equipment, it will often have two options: lease the equipment and pay the rental payments without obtaining the equipment, or it could take the risk and obtain a loan of some sort to purchase the equipment outright. However, today there is a third option and it is one that has more advantages than many entrepreneurs might realize: the equipment financing agreement.
Where you can get an equipment finance deal
From the term, one might think that it is simply another form of purchase loan agreement, available through a traditional loan broker. In reality, an equipment finance deal is available with the same types of companies that would normally be the source of equipment leasing, a surprising fact that many business owners overlook because they mostly only think about short-term options, rather than long term. especially when it comes to money.
While this might not be an option for businesses that are only looking to use new equipment for a limited time, those looking to make a significant investment in their business through the purchase of new equipment could very well benefit from this type of program. Not only will they be able to finance the purchase on more reasonable terms than those available through traditional means, but they will also reap property and tax benefits at the same time.
Profits
In this type of financing contract, the company assumes full ownership of the equipment, although it is technically considered a lease until final payments are made. This means that it can be considered as capital property from day one, even if it has not yet been paid in full. It also entitles the business owner to take advantage of tax breaks granted for the purchase of new equipment with the intent to grow or expand that business, just like those available to owners taking a capital lease. This could mean considerable savings on year-end taxes, depending on the monetary value of the equipment.
Of course, one of the main benefits of this type of arrangement is the lower monthly payments. Instead of investing a large amount of capital to buy the equipment, or taking out an unnecessary loan for the full amount plus interest, a business can take advantage of the ability to use it, while making payments that leave more capital available to invest in other aspects of the business. . For some companies, this could mean the difference between going ahead with expansion plans now or delaying them for years until they have raised the capital.
Disadvantages
Of course, taking ownership of a capital asset has its drawbacks. First, from day one, the company that takes ownership of the equipment is responsible for all maintenance, upgrades, and replacement, should something go wrong. It also requires the company to create a security agreement with the leasing company, as a guarantee that they will be paid the purchase price in terms of their other guarantees, in the event of default or bankruptcy.
While some business owners may find this more expensive than simply taking out a loan, entering into an equipment finance agreement with a reputable leasing agent makes it a more affordable option for two very good reasons. First, no interest is charged on the principle for the duration of the financing agreement. Second, the leasing agency underwrites the financing, and if you’ve gone through one the company has worked with in the past, the financing is virtually guaranteed. And, while a lending company would list the purchase price as market value plus interest, a leasing company would list it as current value, a bonus if the equipment is actually used.