Starting a new business is an exciting time filled with hopeful expectations. Indeed, the promise of future success can feel exhilarating. For many types of businesses, new owners are often stunned by the amount of capital required to get started. It’s not uncommon for the dreams of a newly-minted enterprise to turn into a case study of financial limitations.
Depending upon the industry in which your company operates, you may need industrial tools, landscaping gear, heavy-duty vehicles, or computers. Your decision regarding whether to purchase or lease these items will be based upon your unique situation. Below, we’ll explore the choice between equipment financing and leasing. We’ll look at the decision in the context of your short and long-term needs, cash flow circumstances, and tax considerations.
Short-Term Vs. Long Term Use
Some of the assets that your business needs may have limited use according to the requirements of short-term projects. Once a project has reached its end, the assets may no longer be useful to you. On the other hand, other tools may have long-term utility because they can be applied to ongoing projects. This should be a key factor in your choice to either purchase or lease.
A leasing arrangement may be appropriate when the tools you require quickly outlive their usefulness. Rather than being saddled with the assets, along with the responsibility of selling them, a lease provides a helpful escape hatch. When you’re planning to use the assets for the foreseeable future, equipment financing may be more appropriate because it grants you ownership of the property.
Technological Advances
A lot of industries require companies to upgrade their tools frequently in order to remain competitive. For example, banks, commercial printers, and laboratories employ tools that tend to become outdated quickly. When they do, they need to be replaced which can require a significant cash outlay.
By contrast, other industries use assets that are less susceptible to replacement due to technological advances. Restaurants are a prime example; refrigerators, freezers, and grills can last several years without needing to be replaced. As a result, restaurant equipment financing is often a better choice than leasing.
Impact On Cash Flow
For small and medium-sized businesses, preserving cash flow is a perpetual challenge. If your company has rigid cash flow constraints, leasing assets can provide financial breathing room. It offers access to the property you need without requiring a significant upfront investment. Equipment financing agreements often require a sizable down payment. That cash outlay can force you to allocate limited capital that might be better directed elsewhere.
Tax Considerations
Equipment financing and leasing arrangements have different tax implications. In most cases, your monthly lease payments represent a deductible business expense (which you should factor into the cost of the lease). Tax law treats purchased assets (some types are excluded) based upon a system of graduated deductions. Excluded property may be eligible for tax deductions based upon a scale of depreciation. You should consult a tax advisor to identify the best route for your circumstances.
Finding Flexible Terms
With credit markets remaining constricted, banks have become more vigilant concerning the equipment financing terms they’re willing to offer business owners. What’s more, when a loan is extended, it can affect a company’s access to further credit.
If your business requires expensive equipment and securing a loan from your bank isn’t a promising solution, it may be time to consider alternatives. Many companies specialize in helping other businesses find the equipment financing they need. With flexible terms, they can help you preserve your limited cash flow while providing immediate access to the tools your company needs in order to compete.
Christine O’Kelly is a writer for Landmark Financial Corporation, an industry leader in restaurant equipment financing. They offer professional underwriting services, minimal paperwork, and access to critical investment capital. As specialists in equipment financing, they serve clients in several industries.
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