You might want to know which one would be more advantageous to you: an equipment loan or a lease. Depending on your business and income, they both have their pros and cons. This article is going to discuss whether or not equipment loans are better for you or equipment leases.
What is the main difference?
The difference between an equipment lease and finance is the ownership. A lease contract allows you to rent business equipment for a monthly payment, but you do not get to own this equipment. Equipment finance is a loan with collateral that will enable you to purchase equipment. Once the loan gets fully repaid, you own it.
How this works for small businesses
From a small business perspective, there are plenty of tools that can be considered equipment. Think about it like computers, kitchen appliances, office fixtures and furniture, company cars and HVAC units. The costs for this specialized and necessary equipment can stack up, and it might get impossible to pay for everything using your capital entirely and exclusively. This is why the difference between a lease and a loan becomes significant. Equipment lease here is a rental agreement, and a mortgage is what falls under business loans.
These can both help you acquire business equipment but in different ways. Here are some pros and cons that can help you figure out which one you should pick for your business.
When you lease equipment, as mentioned earlier, you will not be the owner of the machine. You are getting it on rent from a vendor. By the time your lease ends, you can choose to purchase it, renew the contract, or return it. Here are the two main types of lease contracts:
This type of lease has low monthly payments and allows the business owner the option of owning the equipment at the end of the lease term, but only at its then-fair market value. That is why this lease is also known as a fair market value lease.
This type of lease has a higher monthly payment and resembles a loan more than a lease contract. The difference is that the lease contract does not appear on your balance sheet while your lease is still valid. At the end of the agreement, the business owner has the option to buy the leased item for a nominal price, like a dollar or 10% of the purchase price. The examples above are legitimate options in the leasing industry.
Keep in mind that some capital leases are indistinguishable from equipment loans.
This type of loan ensures that you will have ownership of the equipment by the time you finish paying off the loan. With this option, your lender will show you the capital to pay for the pieces of equipment. Based on what you decide to buy, your equipment financing company can loan you the entire or most of the total value of the machines. You can pay down your loan with interest over time.
Which one should I choose?
This entirely depends on your needs and financial capability. If you do not have the kind of money or necessity of a piece of equipment for say more than three years, you can have it leased. That way, you will not have unnecessary items that you could have better spent your money on better equipment.
However, if you fully intend to use the equipment in the foreseeable future, using equipment loans might be the way for you. So, hopefully, this article has illustrated the difference between equipment leases and loans.