How are Equipment Loans Different from Equipment Leasing
Buying equipment is one of the main reasons why business owners seek loans and outside financing. This includes the need for desks, computers, farm machinery, or industrial machinery. Some of these cannot be acquired without spending the full money upfront. Below is a discussion on equipment financing and its different types.
Use of Equipment Financing
Equipment financing is a lease or a loan used to buy assets for a business. This covers all kinds of assets including a vehicle or an additional instrument. Usually, businesses acquire equipment financing through different financing solutions, and in the following situations.
- When they need slightly expensive equipment but are unable to afford it, as it needs to be paid for up-front.
- When they need to change their equipment regularly because it has a very short span of operation, or if they need to keep themselves on par with the latest technology.
Considering these situations, it might sometimes be right to say that equipment financing is the right option for your business. There are two different types of it: equipment leasing and equipment loaning. These two things help you achieve the same goal but have differences in the methods followed to achieve them. Below is a discussion regarding the two.
An equipment loan is a loan acquired out of the need to purchase equipment. Usually, the equipment loan is secured by placing the equipment itself as collateral. This means that in the case of an inability to repay the loan amount, the equipment would be seized or sold by the lender.
This suits business owners who are looking to purchase equipment for long-period use, but are unable to pay for it at the beginning. Lenders may be willing to pay you the major portion of the capital needed, and you would then have to repay them periodically and in installments. There are a few things you need to be wary of here. Such loans provide you only 80% – 90% of the expense, and you are left to cover the remaining. Furthermore, this would cost you more on the overall than the original amount borrowed.
Equipment Leasing is a good choice if you need to trade your equipment often, or if you cannot afford the full capital needed to pay back a loan. In this method, instead of borrowing money to buy equipment, you pay a fee to borrow equipment. Therefore, technically, the leasing company (lessor) is the owner of the equipment but allows you to use it.
Equipment financing is the best option for businesses looking to purchase equipment but unable to afford them in the near future. The above are the two types of equipment financing available, which you should choose between after careful consideration.