Most businesses need equipment to operate on a daily basis. Specialized equipment is often expensive and, worse, only usable for a certain amount of time before replacements and upgrades are necessary. While many business owners plan for—and stress over—large equipment purchases, there is another option available! Instead of purchasing equipment outright, you might consider leasing.
What is equipment leasing?
Leasing business equipment is similar to leasing a car. Business owners can rent equipment over a pre-determined period of time without the obligation to purchase. Under a leasing contract, you’ll make routine payments on the equipment until the lease term ends. Then, you can renew the lease, return the equipment or purchase it.
The two main types of equipment leases are capital leases and operating leases. Under a capital lease, you’ll list the equipment as an asset on your balance sheet. Many capital leases end with an equipment purchase. Operating leases are designed for equipment you do not intend to own later. These leases usually have lower payments.
Benefits of leasing over buying
Business owners often believe they need to purchase their equipment outright, but this isn’t always the right choice. Equipment leasing has the potential to be more beneficial and profitable for small businesses.
- Afford it up-front: Many small businesses lack the cash needed to purchase new equipment, especially if they’re just starting out. Leasing allows you to spread the cost of equipment out over time while you get the tools you need immediately. Most leases don’t even require a large down payment. This is particularly useful if you have a tight budget, since equipment leasing helps free up capital for other startup costs.
- Build credit: Both new and existing businesses need to maintain good business credit to qualify for loans and other financing down the road. Equipment leasing is a great way for businesses with underdeveloped or low credit to establish a strong payment history.
- Upgrade easily: Equipment doesn’t last forever. There are always better and faster models that will allow you to operate more efficiently. When you buy equipment, it’s not always easy to upgrade or replace it. Leasing your equipment allows you to match your payment plan to the end of the equipment’s usable life. At the end of the lease term, you can easily upgrade to a newer model to stay on the cutting edge.
- Generate better cash flow: Quality equipment is necessary for most businesses to generate revenue, but those needs might ebb and flow by the season. If you buy equipment up-front, you’re creating a financial hole that needs to be refilled no matter what. Leasing equipment lets you pay for your lease using the money you earn from faster, better and more efficient tools. During busy seasons, you can lease equipment and return it in slow seasons.
Equipment leasing isn’t right for every business, or for every piece of equipment. It’s important to consider the average life of the equipment you need, how often that equipment needs to be upgraded and how the cost factors into your budget. Equipment that’s routinely upgraded may be leased more cost-efficiently, while long-lasting equipment might be better to purchase.
Whether you’re leasing or purchasing your small business equipment, you need fast access to capital. Tenet Financial Group’s financial products help small businesses get the equipment they need, when they need it. Contact us today to learn more.