Article summary: There are a couple different ways to finance the purchase of business equipment. Depending upon your business, equipment leasing and equipment financing are both options worth considering. Here’s what you need to know.

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When most people of think of equipment, they don’t think of office furniture or a pizza oven; but in terms of business equipment financing, or leasing, those things are considered equipment just like a large milling machine or construction implement. Any tangible asset, other than property or buildings, used in the operation of a business may be considered business equipment.

There are two ways for a business to finance the purchase of equipment:

  1. Equipment Leasing
  2. Equipment Loans

How Does Equipment Leasing Work?

In simple terms, equipment leasing has some similarities to an equipment loan, however it’s the lender that buys the equipment and then leases (rents) it back to you for a flat monthly fee. Most equipment leases come at a fixed interest rate and fixed term to keep those payments the same every month. Rates can vary depending upon the leasing company and your credit profile (anywhere between high single digits and 30% or more), so it makes a lot of sense to shop around before you commit. At the end of the predetermined lease term, depending upon the lease, the business owner may be able to purchase the equipment at fair market value, or a predetermined amount—sometimes for as little as $1.

Leasing may be attractive to business owner who needs equipment that becomes outdated quickly, or is expected to suffer a lot of wear and tear over the course of its useful life, because it allows the business to regularly update equipment at the end of the lease term.

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The Ins and Outs of Equipment Leasing

Like small business lenders, a leasing company will consider your personal credit in addition to your business credit profile when evaluating your application. And, similar to many online lenders, most leasing companies today offer approval as quickly as within just a few minutes and offer competitive rates and lease terms. Leasing companies often specialize in specific types of equipment too, so make sure you’re talking to companies that specialize in the type of equipment you want to lease.

Depending upon the equipment, lease terms could extend from three, seven, or even 10 years. Because a lease is not a loan, and does not appear on your credit report as a loan, other lines of credit are not tied up in the purchase of equipment so you can use your credit lines for something else. Your lease payment might even be deductible as a business expense (this is something you should consult with your tax accountant about).

The leasing company actually owns the equipment unless you buy it from them at the end of your lease term. However, your timely payments will likely be reflected on your business credit report the same as any other revolving debt—provided the leasing company reports to the business credit bureaus (which it probably does).

An Equipment Loan is an Alternative to Leasing

Depending upon the nature of the equipment, its useful life, and whether or not the intention is to keep it as a long-term asset, an equipment loan could make sense for a small business.

Because in some situations, a lease can cost more than a loan, many businesses choose to finance the purchase of equipment rather than lease. Additionally, the entire amount of a lease payment may not be tax deductible if your lease terms include any provision allowing you to own the equipment at the end of the lease. You’ll need to consult with your accountant or financial advisor to see if this is the case for your situation.

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