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:
- Equipment Leasing
- 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Leasing may be attractive to business owner who needs equipment that becomes outdated quickly, or is expected to suffer a lot of wear and tear over the course of its useful life, because it allows the business to regularly update equipment at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.
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.
What type of loan makes sense for your business?
Financing options to help you grow your business
If you’ve ever heard the adage, “It takes money to make money,” you must be a small business owner. Fortunately, there are more small business loan options available today than ever before—you just need to know where to look and what to look for. You don’t need to be a financing expert to build a successful business, but you do need to consider all the business loan options available to determine which one is best to meet your business need.
Unsecured Small Business Loans
An unsecured business loan is simply a loan from a lender that does not require any form of collateral from a business or a business owner. This is based solely upon the creditworthiness of the applicant.
Many small business owners are interested in a loan for their business but don’t have the specific collateral a bank may require, such as specifically-identified real estate, inventory or other hard assets. Fortunately, there are lenders like OnDeck that do not require that their loans be secured by specific collateral, relying instead on a general lien on the assets of the business. These may be good options for many businesses.
Secured Small Business Loans
Banks generally prefer secured—rather than unsecured—business loans. Secured loans are loans that are backed with some sort of collateral like real estate, equipment, or other valuable business assets the bank can seize and sell if the loan is not repaid.
Banks (or other lenders that require specific collateral) commonly determine what they refer to as the loan-to-value ratio of your collateral based upon the nature of the asset. In other words, your banker may allow you to borrow against 75 percent of the value of appraised real estate or 60 percent to 80 percent of the value of what they call ready-to-go inventory. Because lenders might consider their loan-to-value ratios differently, you’ll need to ask any potential lender how they intend to set that value.
Small Business Loans for Different Industries
As a business owner, your needs may be industry-specific such as ordering kitchen supplies upfront or bridging cash flow while you wait for insurance reimbursement. At OnDeck, we understand and we offer tailored loan options (with multiple loan types, amounts, and repayment terms), so you can get a loan best suited for your industry and business. Here are some of the most common industries we work with and the small business financing options available to them.