How To Finance Your Equipment and What Method To Use
Equipment financing is a complex issue for any business, primarily because there’s no one right way to handle it. The best forms of financing depend on the type of machine you’re looking for, its expected working lifecycle, your current business tax stance, and its cost. That’s a lot to weigh, so it’s no surprise that so many small business owners wonder whether buying or leasing is the right move, and what kind of terms and payment structures to look at for each option.
As a rule, you want to buy the machines that you will be able to keep and maintain for a long time. Heavy equipment that must be built into your facilities would fall under this category, like the large extrusion presses in metal manufacturing facilities. Smaller pieces that have a long lifespan like cargo cranes and the drills and punch presses for fabrication would fall under that category as well. If you’re not in manufacturing, this would be the category for major vehicle investments and infrastructure equipment like warehouse shelving, too.
The other side of the equipment financing coin is leasing, which is best when you’re anticipating a short lifecycle, temporary need, or you’re looking to count the cost of the equipment as a cost of operation and not an asset investment. That latter distinction is important for tax purposes, and your accountant can talk to you about how any given equipment lease will affect your tax situation, but generally leasing lowers your tax burden.
Choosing a lease under these conditions will assure you can upgrade easily, get rid of the equipment when your need passes, or just avoid the long-term commitments of ownership. Some leasing agreements even outsource your maintenance to the owner, allowing you to enjoy the equipment without worrying about fixing it if it breaks down.
If you purchase, you’ll want to try to get the longest payment terms possible when you are buying larger equipment, to allow yourself to reach a return on your investment more quickly by making it possible for the equipment to produce more than it costs much more quickly. There’s still going to be a window where your costs are in and you’re waiting for it to do enough work to cover the down payment investment, but that’s a lot easier than earning enough for the whole machine to pay for itself.
If you keep these tips in mind when deciding whether to borrow or to lease, you’ll have an easier time navigating your way through thorny equipment financing questions. Approach each new purchase fresh, too, because what’s right for one machine won’t necessarily be your best option for the next one.