Equipment Lease or Loan? Deciding What’s Right for Your Business

From family restaurants to laundromats to salons, nearly all businesses require some type of equipment to conduct daily operations. Whether you’re looking to prepare to launch a business, or you’re needing to replace equipment from normal wear and tear – getting new equipment in hand is no small undertaking.

Regardless of what life stage your business is in, you’ll need to consider the financial options available to you. There are three primary possibilities:

1. Buy new equipment outright
2. Equipment lease
3. Equipment loan

We get it; buying new equipment isn’t always an option for every business. Leases and loans are financial tools that ensure you have the capital necessary to continue operations, regardless of equipment needs. In this article, we'll explore the difference between an equipment lease vs. loan, and the factors that need to be considered so you can make the right decision for your business.

 

Equipment Lease vs. Loan: What’s the difference?

Lease and loan, though they may be used interchangeably, actually mean two different things.

An equipment lease is when the bank provides funds to cover equipment leasing costs, as opposed to purchased equipment.

An equipment loan is when the financial institution loans money to an organization for the purchase of equipment. The business can then repay the loan back, with interest, over time.

Though both options provide your business with the necessary capital for equipment, one may be a better fit for your business. To determine which option is right for you, consider the status of your business and, specifically, the tax implications, your financial status, and long term goals.  

 

Factors that Impact the Status of your Business

Before deciding whether to get a lease or a loan, determine whether financing is truly necessary. Can this equipment purchase wait one more year? Do you have the resources to pay out of pocket? Financing equipment is a big decision and a long term commitment, so ensuring it’s imperative to the success of your business is an important first step.

Once you’ve identified the appropriate timing, take a look at the three Cs: credit, capital, and character.

• Credit - Businesses have credit scores just like people, and as the owner it’s important to be familiar with your company’s financial standing. This will help your lender determine eligibility for financing. In a general sense, businesses with a solid credit history and a few years of experience under their belt are well-positioned to secure loans.
• Capital - Your lender will also take a close look at the business’ cash flow and financial projections. It’s important to ensure you have a paper trail to prove that your business is profitable and capable of paying back money.
• Character - This process requires an honest and transparent conversation, and trust is extremely important when setting the business up for success. Your lender may require a resume of experience, along with a personal statement, to gauge whether you’re ready for a lease or loan.

 

Managing Business Cash Flow and More

 

Which Financing Option Should You Pick?

Every business is different, but the type of equipment your business requires is an indicator of which financial route to take.

Generally speaking, a loan is better for equipment when the business has up-front capital and needs to have equipment for the long term. On the other hand, leasing may be a better option if you don’t need to eventually own the equipment, or if you use equipment that is quickly outdated, like IT equipment.

It’s worth noting that leases granted by Rockland Trust offer the option of 100 percent financing on equipment. This means that you don’t need to commit to a heavy up-front capital investment.

Within the category of equipment leases, there are two types of leasing options: an operating lease and a capital lease.

• An operating lease is similar to a car lease – the equipment isn’t owned by the business at the end of the lease, and will be returned to the provider.
• A capital lease is on your balance sheet, and the full equipment cost is paid over the term of the lease. At the end of the lease term, you own the equipment for a nominal purchase price.

Operating leases are great for equipment with a clear, and often brief, lifecycle, while capital leases are ideal for equipment you plan to utilize long-term.

Tax advantages may be something to consider for your business, as well. In the case of a lease, for example, the interest each month may be a tax write-off. Connecting with a financial planner will help you gain clarity around your tax options and determine the best course of action for your business.

 

Getting Started

Regardless of the route you take, our team is here to support your business needs. From determining financing solutions to strategic counsel in the years to come, we’re on your team as someone you can trust.