Equipment Lease vs Equipment Loans
When small business owners are going to finance equipment they often find themselves at a crossroads: should they opt for an equipment lease or an equipment loan? Both options come with their own set of advantages and disadvantages, making the decision-making process a critical one for the financial health and growth of the business. This quick pros and cons list can help you make an informed decision for which one suits your business needs best.
Equipment Lease:
Pros:
- Lower Payments: One of the primary advantages of opting for an equipment lease is the payments tend to be slightly cheaper. Instead of tying up a large sum of money upfront to purchase equipment outright, a lease allows businesses to spread out the cost over time, preserving cash flow for other essential expenses such as payroll, marketing, and operational costs. Also, payments tend to be slightly less on leases than loans.
- Flexibility: Equipment leases offer flexibility in terms of equipment upgrades. As technology evolves, businesses may need to upgrade their equipment to stay competitive. Leasing allows for easier transitions to newer, more advanced equipment without the hassle of selling off old equipment or dealing with depreciation. Many leases allow you to simply return the old equipment and re-up the lease for the newest model!
- Tax Benefits: Lease payments are typically considered operational expenses and may be 100% tax-deductible, providing potential tax benefits for businesses. Consult with a tax advisor to understand the specific tax advantages available in your region.
Cons:
- Long-term Cost: While leasing equipment may seem more affordable in the short term due to lower monthly payments, it can result in higher overall costs over the long term compared to purchasing equipment outright. Businesses should carefully weigh the total cost of the lease against the benefits of ownership.
- No Ownership Equity: With an equipment lease, businesses do not build equity in the equipment. Once the lease term ends, the equipment is usually returned, leaving the business without any tangible assets to show for the payments made.
Business Loan:
Pros:
- Ownership: Perhaps the most significant advantage of opting for a business loan to purchase equipment is ownership. With a loan, businesses own the equipment outright once the loan is repaid. This can be beneficial in the long term as the equipment can be used as collateral for future financing or sold if needed.
- Cost Savings: While loans may require a higher initial investment compared to leasing, they can result in cost savings over time. Without the additional expense of lease fees, businesses can often pay less total for the equipment. Although this doesn’t account for tax savings from lease deductions.
- Credit Building: Successfully repaying a business loan can help build the business’s credit history, making it easier to secure financing at more favorable terms in the future.
Cons:
- Up front costs: Obtaining a business loan typically requires a down payment or collateral, which may be a challenge for businesses with limited cash or assets that are free and clear.
- Depreciation: While ownership provides equity in the equipment, businesses must also contend with depreciation. The value of the equipment may decrease over time, or the market could be effected by external circumstances impacting the business’s overall value in a given assett.
In conclusion, the decision between an equipment lease and a business loan ultimately depends on the specific needs and financial circumstances of the business. Businesses should carefully evaluate the pros and cons of each option and consider factors such as cash flow, long-term goals, and tax implications before making a decision. Whether it’s conserving capital through an equipment lease or gaining ownership through a business loan, the right choice can pave the way for sustainable growth and success.
Ryzen Capital offers both, Equipment Lease and Business Loan options and the process for getting pre-approved is the same. If you are ready to make a purchase apply now and a member of the Ryzen team will call to review your options. Or call 801.923.6100
