Acquiring equipment for your company is usually one of the first steps toward stepping into business or improving the processes.
Whether it's heavy machinery for a construction company, cutting-edge technology for a startup, or specialized tools for a manufacturing operation, all businesses rely on equipment to function efficiently.
When it comes to obtaining the necessary equipment, two prominent options emerge: equipment leasing and equipment financing.
While both avenues serve the purpose of acquiring vital assets, they do so through distinct mechanisms, each with its unique advantages and disadvantages.
Looking at the details of these options will help us better understand how we can harness the power of equipment for business success.
Let’s dive into it!
An equipment lease is a contractual agreement between a lessor (the equipment owner) and a lessee (the equipment user) that grants the lessee the right to use the equipment for a specified time in return for consistent payments.
This table provides a structured overview of the equipment leasing process step by step with the explanation of each one:
A typical equipment leasing goes as follows:
Assume that €50,000 worth of production-related equipment is rented for the next three years in anticipation of short-term demand.
The lease has a three-year duration or 36 months of monthly payments are needed.
(0.05/36) or 0.0014 is the lease rate factor if the current interest rate is 5%.
After three years, the product's depreciated value is €15,000, meaning that the tenant company's equipment worth is €35,000 (€50,000 – €15,000).
The monthly lease payment, after depreciation, will be (€35,000/36) = €972/month. The interest will therefore be determined as follows: €50,000+€15,000)*0.0014 = €91, taking into account the lease rate component.
The amount the business must pay each month to lease this specific equipment is €972 + €91= €1063.
Equipment leasing is an appealing choice for businesses due to several key factors:
Equipment financing is a financial arrangement where a business obtains the necessary equipment or assets by securing a loan or credit specifically for that purpose.
The equipment itself serves as collateral for the loan, allowing the business to make manageable payments over time while gaining immediate access to the needed equipment.
This table provides a structured overview of the equipment financing process:
Imagine a small restaurant owner who wants to upgrade the kitchen with new cooking equipment, including industrial stoves, ovens, and refrigeration units. The total cost of the new kitchen equipment is €50,000, which is a significant investment.
To preserve working capital and avoid substantial upfront expenses, the restaurant owner decides to opt for equipment financing.
Equipment financing enables businesses to access the necessary assets while spreading the cost over time.
It allows companies to acquire essential equipment and assets without the need for a substantial upfront investment.
This preserves working capital, enabling businesses to allocate their funds to other critical operational needs.
Moreover, equipment financing often offers tax benefits, as lease payments or interest on loans may be considered operating expenses, potentially reducing the overall tax burden.
Lastly, equipment financing provides flexible terms, safeguarding against the risks of equipment obsolescence, and allowing businesses to tailor financing arrangements to their specific requirements and changing circumstances.
There are several pros and cons of equipment leasing:
✅You do not have to pay the entire cost of the asset upfront, so you do not deplete your cash reserves or have to borrow money.
✅You get access to higher-quality equipment that would be too expensive for you to buy outright.
✅You pay for the asset over a predetermined time, which helps you budget for the future.
✅The leasing business bears the risks. If the equipment fails or has to be upgraded or replaced, you can simply make a small modification to your regular payment rather than investing a large sum upfront.
🚫If the lease length is less than five years (and in some situations less than seven years), you cannot claim capital allowances on the leased assets.
🚫You may be required to provide a deposit or advance payments.
🚫It may be more expensive than purchasing the assets altogether.
🚫Your company may be stuck into restrictive medium or long-term agreements that are difficult to terminate.
🚫When you lease an item, you do not own it, though you may be able to purchase it at the end of the deal.
There are several pros and cons of equipment financing:
✅By spreading out the cost of large purchases, you can avoid cash flow issues.
✅You can use the equipment's revenue-generating power sooner than if you saved up for an all-cash purchase.
✅You may be able to obtain more favorable rates and terms than with other types of small business loans.
✅Other than the financed equipment, you may not be required to put up any personal or business assets as collateral.
✅Even if your credit is less than stellar, you may be able to qualify for a self-collateralizing equipment loan.
✅Consistent loan payments can help your business build credit.
🚫You may be able to use the loan funds solely to purchase equipment, whereas other loan types provide greater flexibility.
🚫You will spend more in the long run than if you paid cash - and you may still be making payments after the equipment has outlived its useful life.
🚫If your lender isn't confident in the equipment's aftermarket value, you may be offered less favorable terms.
🚫You may be unable to obtain a loan to cover transportation, installation, and other costs.
🚫You will be in charge of maintenance and repairs, though some operating leases may include a service agreement.
Choosing between equipment leasing and financing involves careful consideration of your business's financial situation, needs, and long-term goals.
First, assess your current financial position.
If preserving capital and maintaining liquidity are priorities, equipment leasing may be the more suitable choice, as it requires minimal upfront costs.
Next, evaluate the nature of the equipment and its expected lifespan.
If you plan to use the equipment for an extended period and see it as a long-term asset, equipment financing might be a better option, as it leads to ownership and potential equity building.
Consider your tax situation, as lease payments and loan interest may have different tax implications.
By understanding the nuances of these options, businesses can make strategic decisions that align with their specific needs and pave the way for future growth and success.
Myos provides tailored solutions for various financial challenges, bolstering cash reserves, fostering company expansion, and mitigating payment fluctuations.
With Myos, you can grow your business without the worry of cash flow constraints or depletion of funds.
Myos operates seamlessly without individual guarantees, allowing you to focus on expanding your enterprise.
👍 No additional fees are involved, and you have a 12-month repayment period - all without penalties, even if you decide within a week that the funds are no longer needed.
👍 Myos doesn't act as an intermediary between you, your vendors, and your clients, preserving your connections and competitive edge.
👍 Online financing applications streamline the process, requiring minimal paperwork and avoiding lengthy forms.
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