Construction businesses tend to evolve day by day. For most construction businesses, heavy construction equipment plays a crucial role. Without up-to-date construction equipment, a construction business cannot survive in this highly competitive world. This is why you must have the necessary and up-to-date equipment to run your daily operations and grow your business. However, owning construction equipment can also be expensive. Being in a business that needs lifting equipment, businesses always come across the question of whether equipment buying or leasing is the right option.
Equipment buying requires a lot of money, which you can receive from equipment financing. Smaller companies may not have enough capital, opting for equipment financing or leasing based on their needs. When you are going to make a final call, make sure you understand both the advantages and disadvantages of equipment financing and leasing. It will help you choose the right option for your equipment needs. Don’t mess up your mind when you are confused between these two options. Just read out the blog and find the best option for your business’s growth and success:
How does equipment leasing work?
As the name suggests, equipment leasing works by leasing a piece of equipment to a lessee. A lessor will lease your equipment and give you the authority to use it. In exchange, you will pay a certain amount of money to a lessor. Leasing agreements may depend on the lessor. Generally, a lessee needs to pay a scheduled monthly payment to utilize a piece of equipment. Apart from that, there are also additional payment options including coverage for repairs. The lessor will be liable if the equipment breaks down or stops working while in use. In simple words, it can be said that you will not be able to own the equipment despite paying regular payments. You are just paying for the right to use the equipment.
Pros
- It comes with no down payment flexibility.
- It offers lower upfront costs. Leases often need little to no down payment, saving cash flow for other business requirements.
- Leasing makes you feel flexible to upgrade the old equipment to a newer one at the end of the lease term. This is how you will have access to the latest technology.
- It frees you from worries about maintaining the equipment regularly and taking care of other concerns. So, you can opt for leasing if you are considering the equipment use for a short-term need.
- Operating leases may not seem on the balance sheet, which enhances financial ratios and makes the business more attractive to lenders and investors.
Cons
- When the lease term ends, the business does not own the equipment unless it goes for a capital lease with a buying option.
- Lease agreements often involve limited terms and conditions including usage restrictions or mileage limits that can limit the flexibility of a business.
- As time passes, leasing can be more costly than buying, particularly if the equipment is used beyond the lease term.
- Leasing needs continuous payments till the time you are using the equipment, which can add up with time.
How does equipment financing work?
Another term for equipment financing is equipment loan. Equipment loans are designed for those businesses requiring money to buy equipment of their choice and needs. In equipment financing, a business owner borrows money from a lender and uses the money to purchase the equipment. Based on the terms, you are required to pay regular payments until you completely settle the loan. The major thing is that when you have completely satisfied the loan, only then you will officially own the equipment.
In case, you fail to pay the regular payments and settle the debt, you become a defaulter on the loan. Here, your equipment itself works as collateral. The lender takes complete ownership of the equipment if you do not pay the loan in a given period of time.
Pros
- Equipment financing lets you own the equipment once the loan is completely repaid. Now, the equipment you own can be considered a valuable long-term asset.
- The interest payments you pay on the loan and depreciation on the equipment can be tax-deductible. It means that equipment financing offers you potential tax savings.
- It comes with fixed interest rates and expected monthly payments that can help you make financial planning simpler and more effective.
- In equipment financing, regular payments contribute to creating equity in the equipment that you can use as collateral for your financing needs in the future.
Cons
- Equipment loans may require down payments that can offer a substantial upfront cost for those businesses having limited capital.
- Having a loan increases the debt load for a business which can affect its creditworthiness and borrowing capacity.
- As you bound yourself in debt for a long time with equipment financing, it means that you bear the risk of the equipment becoming old, outdated, or less effective with time.
- You are solely responsible for managing the equipment in every aspect including the entire associated with its maintenance, insurance, and repairs.
Which is better: Equipment Financing or Leasing?
In simple terms, we can say that which option either equipment financing or leasing is better, is dependent on your business needs and preferences. The basic difference between equipment financing and leasing is that equipment financing allows you to purchase a piece of equipment, whereas equipment leasing allows you to use/rent a piece of equipment. In equipment financing, the equipment can be yours, but only when you repay the loanfully, while equipment leasing does not let you own the equipment unless you pay the complete cost of the equipment. Both funding options come with their merits and demerits that you should understand before choosing anyone for your equipment financing needs.
Now, it depends on you which funding option you consider to buy equipment for your business and enhance your business’s operations. Experts such as EQUIPMENTBUSINESSLOANS.COM can help you choose the best funding solution for you after assessing your business needs. All you need to do is to approach experts online and discuss your concerns with them.
