04 Feb Options to Finance or Lease Equipment for Your Business
Investing in the right equipment is crucial for business growth, but the upfront costs can be overwhelming. Whether you’re a small business owner needing machinery, a restaurant requiring new kitchen appliances, or a construction company looking for heavy-duty vehicles, financing or leasing equipment can provide the capital you need while preserving cash flow.
Every business has unique financial needs. In this guide, we’ll explore the different options available for financing or leasing equipment so you can make the best choice for your business.
Business Equipment Financing vs. Equipment Leasing
Before diving into specific financing and leasing options, it’s important to understand the fundamental difference between these two methods:
- Business Equipment Financing: This involves taking out a loan to purchase the equipment outright. You make payments over time until you own the equipment.
- Business Equipment Leasing: Instead of buying, you rent the equipment for a fixed period, often with the option to purchase at the end of the lease.
Each option has its own benefits and drawbacks, which we’ll explore below.
Equipment Financing Options
If you want to own your equipment but don’t have the cash to pay for it upfront, equipment financing is a great solution. Here are some of the most common financing options:
1. Equipment Loans
An equipment loan is a specific type of loan designed to help businesses purchase machinery, tools, or technology. These loans are typically secured by the equipment itself, meaning you don’t need additional collateral.
Key features of equipment loans include:
- Loan terms range from 1 to 7 years.
- Down payments can vary (typically between 10-20%).
- Fixed interest rates help with predictable monthly payments.
- The equipment serves as collateral, reducing lender risk.
This financing option is best for businesses that want long-term ownership and can afford down payments.
2. SBA 504 Loans
The Small Business Administration (SBA) 504 Loan Program is an excellent financing option for purchasing large equipment or machinery. These loans are partially backed by the SBA, making them more accessible for small businesses.
Key features of SBA 504 Loans include:
- Lower down payments (10% in most cases).
- Fixed interest rates with long repayment terms (up to 25 years).
- Can be used for equipment, real estate, and expansion projects.
The ideal candidates for SBA 504 Loans are businesses needing long-term, low-interest financing for high-cost equipment.
3. Business Lines of Credit
A business line of credit offers flexible funding that can be used for equipment purchases or other expenses. Unlike a loan, you only pay interest on the amount you use.
Key features of a business line of credit include:
- Revolving credit (reuse funds as you pay them back).
- No fixed repayment terms; you control how much you borrow.
- Great for businesses with fluctuating equipment needs.
Companies needing flexibility or frequently upgrading their equipment would benefit from using a business line of credit or even an asset-backed line of credit to finance additional equipment.
4. Term Loans
A term loan provides a lump sum of capital that can be used for equipment purchases. These loans come with fixed repayment schedules and interest rates.
Key features of term loans are:
- Typically offered in amounts from $5,000 to $500,000+.
- Repayment terms range from 1 to 10 years.
- Can be secured or unsecured, depending on the lender.
A term loan is ideal for businesses that prefer structured, long-term repayment options.
Equipment Leasing Options
If you don’t want to commit to owning equipment, leasing may be a better alternative. Here are some common leasing structures:
1. Operating Lease (Fair Market Value Lease)
An operating lease, also known as a fair market value (FMV) lease, allows businesses to rent equipment for a fixed period without taking ownership.
Key features of an FMV lease include:
- Lower monthly payments compared to financing.
- At the end of the lease, you can return the equipment, renew the lease, or purchase the equipment at fair market value.
- Good for businesses that frequently update their equipment (e.g., technology or medical industries).
Businesses that need to use equipment for a short time or upgrade frequently will want to consider an FMV lease.
2. Capital Lease ($1 Buyout Lease)
A capital lease, also called a $1 buyout lease, allows businesses to lease equipment with the option to purchase it for $1 at the end of the lease term.
Key features of a $1 buyout lease include:
- Higher monthly payments, but you own the equipment at the end of the lease.
- Treated like a loan for tax purposes (depreciation and interest deductions).
- Ideal for businesses that want to own the equipment long-term.
A capital lease is a good choice for businesses that want ownership but need low upfront costs.
3. Sale and Leaseback
If your business already owns equipment but needs immediate cash, a sale and leaseback arrangement may be an option. In this structure, a lender purchases your equipment and leases it back to you.
Key features of a sale and leaseback include:
- Immediate capital injection.
- Business retains access to the equipment.
- Converts owned assets into working capital.
Businesses that need cash flow but want to continue using their current equipment will want to discuss a sale and leaseback with their lender.
4. Lease-to-Own Agreements
A lease-to-own agreement allows businesses to lease equipment with the option to purchase it at a predetermined price at the end of the lease.
Key features of a lease-to-own agreement include:
- Payments go toward ownership.
- Easier approval compared to traditional financing.
- Great for startups or businesses with limited credit history.
Businesses that plan to keep the equipment but prefer lower upfront costs will want to consider a lease-to-own agreement.
Choosing the Right Option for Your Business
When deciding whether to finance or lease equipment, consider the following factors:
- Budget: How much can you afford in monthly payments?
- Ownership Needs: Do you want to own the equipment or upgrade regularly?
- Equipment Lifespan: How long will the equipment be useful to your business?
- Tax Benefits: Leasing may offer lower payments, while financing provides depreciation benefits.
Securing the right equipment is essential for growth, but paying for it shouldn’t be a barrier. Whether you choose equipment financing for long-term ownership or leasing for flexibility, there are plenty of options to fit your business model. A skilled business loan broker can help tailor a plan to fit your budget and goals.