If you’re thinking about leasing new equipment, do not sign that agreement just yet. In many cases, financing equipment with a business loan can be more cost effective and more beneficial than leasing.
First of all, leases are usually long-term commitments, and all equipment will eventually become obsolete. If your lease terms are longer than the lifespan of your equipment, you may hinder your company’s growth potential by using outdated equipment. When you own your equipment outright, you can sell your old equipment and upgrade to new equipment as your business dictates. You also have equity in the equipment you own, which you can use as collateral for additional financing.
Taking out an equipment loan also offers some tax benefits. In the year you purchase the equipment, you may deduct up to $25,000 of its value; amounts over that depreciate over several years. Find out more about the Elements of a Successful Business Loan Application.
Basic 7(a) loans, which are among the loan programs guaranteed by the Small Business Association (SBA), are common for financing equipment. Loan funds can be used for many business purposes, including working capital, machinery and equipment, furniture and fixtures, land and buildings (including purchase, renovation, and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed, or long-term, assets (assets such as office equipment that can be depreciated). For more information about 7(a) loans, check out the AllBusiness Practical Guide to SBA Loans.
Equipment loans are also available through certain government agencies. If you can show that an equipment purchase will create or help retain jobs, you may be eligible for a low-interest loan through your state or county’s local economic development agency. Funds may be used to finance the cost of acquisition, delivery, and installation of machinery and equipment, as well as costs involved in the closing of the loan that are incurred by the borrower.
Alternative equipment financing options include “sale-leaseback.” Essentially, you get cash to use for any business purpose by using equipment you already own as collateral. Most businesses have some equipment they own outright, which they can leverage to acquire new equipment for expansion or to remain competitive with newer technologies. One of the benefits of this program is that you may be able to depreciate the equipment, even if you have already done so in the past. These loans must usually be paid back within two to five years.
If you have good credit and are carrying a low to moderate amount of debt, a traditional loan from a commercial bank is also an option. Talk to your current lender or financial advisor to see if a bank loan would be a good choice for your equipment purchase.