What to know about Vehicle and Equipment Finance

 

If you own a small business, you know how critical it is to swiftly and affordably upgrade or replace the equipment you need to execute your daily activities. However, investing in machinery, especially during unusual times like a global pandemic, is difficult because cash flows are already stretched thin. Would you pay your rent in advance for several years? Why should you do the same with your company's equipment? This is where equipment financing comes in handy.

Many firms rely on equipment to complete their tasks. New equipment may also be the difference between stagnation and growth for some businesses. According to many tax agents, companies can use equipment finance to ensure effective operations without depleting their cash reserves while also gaining tax benefits.

What is an equipment loan?

An equipment loan is a type of commercial property purchase & finance option that allows companies to acquire the technology or machines they require. In general, the lender provides the business with financing secured by the equipment being purchased or rented and the business pays the money back in monthly instalments with interest.

The equipment may be used as collateral, which means that if the business fails to satisfy its repayment obligations, the equipment will be seized. The business owns the equipment as soon as the loan is paid in full.

What is equipment leasing?

Equipment leasing is when you pay periodic rent to the equipment's owner in exchange for using the equipment for a fixed time. Unless you both agree on renewal terms or a buyout, the equipment is returned to the owner after the lease.

Leasing requirements are generally less stringent than financing requirements. If the equipment is critical to your firm, however, the ongoing payments on leased equipment with no promise of future outright ownership may be a more expensive option.

Pros of equipment financing

1. Ownership
   The most obvious benefit of equipment financing is complete ownership of the equipment after the loan is repaid. Unlike other equipment that may become technologically obsolete, this is especially valuable for equipment that has a long shelf life, such as farm machinery, restaurant and office furnishings.
   
   
   
2. Improves your business credit
   It can help you build credit for your company as on-time payments have a beneficial impact on your company's credit score.
   
   
   
3. Fast funding
   You can quickly receive the funds you require to undertake a vital company equipment purchase, potentially resulting in faster income and business growth.
   
   
   
4. No need for collateral 
   You may be needed to put up collateral that you already own, such as real estate or vehicles, to qualify for a term loan. With an equipment loan, this isn't always the case. Using the equipment you're buying as collateral for a loan is usually acceptable to alternative and online lenders. This can be quite beneficial because it reduces your risk of losing money and makes it an affordable option.
   
   
   
5. Tax deduction
   According to the tax auditors, you can write off the equipment you buy and the interest you pay as a tax deduction at the end of the year.
   
   

Cons of equipment financing

1. More expensive in the long run
   Because of the interest on the loan, using equipment financing is more expensive than buying the equipment outright. If you can find it affordable, go for it. Unfortunately, most businesses can not.
   
   
   
2. Default risk
   You are taking on business debt, just like any other loan, and you may find yourself in financial problems if you are unable to make payments. This could adversely affect your credit score.
   
   
   
3. Owning the equipment
   Depending on how you look at it, fully owning business equipment could be a pro or a con. Equipment leasing, rather than financing, may be a preferable option for equipment that depreciates quickly, such as computers and software. Equipment leasing makes more sense if you know you'll just need a piece of equipment for a year.
   
   

Equipment loans, unlike many other types of borrowing, are designed for a specific purpose. While this limits the flexibility of these loans, it also implies that, in the right hands, equipment loans can be tremendously beneficial. Take the time to perform research, understand your needs and establish the type of equipment your firm needs before making a final purchase. You'll have all the data you need to make the best decision for your company this way.