Buying new equipment for your business means spending time and energy researching the best equipment, building a budget, and looking for equipment within your budget. Not only is it time-consuming, but new equipment is incredibly costly, especially for small businesses.
Financing goes beyond taking out a line of business credit at your local bank; you must ensure that any money you borrow can be paid back. Also, business owners should consider the return on their investment and only purchase equipment when it can help them become more efficient or support other business goals. There are many ways to finance new business equipment, so here are some of your options:
Paying cash is a popular option for financing your equipment if you have the money to spend. Not only does paying in cash prevent you from having to pay more for the equipment than it’s worth, but you can deduct the total cost of the equipment on your taxes using professional tax software. Of course, the biggest benefit of paying cash for business equipment is that you own it immediately, which can help you save money in the long run.
Unfortunately, there are some downsides to purchasing your equipment outright. If your business equipment evolves and changes yearly, you might not be able to keep up with the costs of upgrading equipment when something new comes out every year. Additionally, you’ll have to pay for any equipment maintenance if there’s a malfunction or an employee uses it incorrectly.
Business equipment is an investment, and it’s not always affordable. If you want to own your equipment and not be subject to rising interest rates and inflation that costs you more, later on, you can choose to purchase used equipment. Purchasing used equipment is ideal when you don’t expect flashy features to change the way your equipment functions. Some businesses don’t need to upgrade their equipment every few years, as long as it works properly.
Additionally, you may not want to purchase all of your business equipment used. While used equipment may not come with a warranty, it likely comes with some guarantee that the equipment will work. However, depending on the nature of your business, you might need new equipment to ensure accuracy and efficiency.
Equipment loans allow you to borrow money to purchase equipment. You can borrow a portion of the cost or all of it. With a loan, you repay the loan over time and with interest, which means your equipment will cost more in the long run. However, once you pay off the loan, you own the equipment, making it a great option for companies that don’t have enough to purchase the equipment outright but still want to eventually own their equipment after the loan term.
Luckily, the loan interest is tax-deductible, but the equipment will depreciate as time goes on. However, a loan could be well worth it if you plan to use the equipment for many years. Equipment loans are ideal for businesses that want to preserve their cash and ensure they have enough to fulfill the needs of the business. In addition, loans free up money for businesses without worrying about spending a lump sum on equipment.
An equipment loan isn’t right for all businesses, though. If your business already has debt, you may not be eligible for a loan or may have to choose a loan with less than ideal terms and a higher interest rate.
Operating leases allow you to use the equipment you need without ever becoming the equipment owner. With a lease, you rent the equipment and only pay for the equipment you use, allowing you to manage your money efficiently. In addition, an operating lease can help companies get the equipment they need within their budgetary limitations, and payments can be tailored depending on their unique financial situations.
Essentially, a lease is a rental agreement for the equipment, and at the end of the lease, you won’t own the equipment. Leases can be a good solution if your equipment quickly becomes obsolete as better equipment comes out every few years. Additionally, it could be a good idea if you only need the equipment for a short-term project but don’t need it for the lifetime of your business.
You can also choose a capital lease, which is slightly different from an operating lease. With a capital lease, the equipment is considered owned by the company, and the company leasing the equipment can claim a deduction on the interest of the lease payments. At the end of a capital lease, there is a transfer of ownership. Capital leases are similar to loans because companies don’t need to have a lump sum to pay for equipment outright, and the company can own the equipment at the end of the lease.
Considerations for Financing Business Equipment
As you can see, there are many options for getting the business equipment you need. However, the option you choose will depend on a few considerations, including:
- Current resources: If you don’t have enough money to spend on equipment outright, you’ll have to rent, lease, or take out a loan for the equipment.
- Budget: Even if you do have enough money to purchase the equipment in cash, you should still create a budget to determine how much you’re willing to spend on new equipment. If your budget isn’t enough to purchase the newest equipment, you might choose to rent or buy used instead.
- Type of equipment: Depending on the type of technology you need, it might change or evolve every few years. If the equipment your business uses comes out with newer and better features, you might not want to purchase products that can become quickly obsolete.
- ROI of equipment: Only purchase business equipment when it can help increase sales. If the equipment might take years to pay for itself, it might be better to rent or purchase used equipment instead. However, if the equipment is something you need for the daily operation of your business and you can afford it, buying it outright might be your best option.
How you finance your business equipment depends on the type of equipment you purchase and your business needs. Always weigh the pros and cons of the indifferent financing options before you spend too much money or choose to take out a loan that can affect the future success of your business.
Julia Olivas graduated from San Francisco State University with her B.A. in Communication Studies. She is a contributing writer at 365businesstips.com where she loves sharing her passion for digital marketing and content creation. Outside of writing, she loves cooking, reading, making art, and her pup Ruby.