By David Sook, Senior Vice President
The latest data from the Equipment Leasing & Finance Association (ELFA) shows that 80% of businesses finance their equipment acquisitions each year, including equipment like computers and office furniture to manufacturing and transportation equipment. As a result, I hear this question quite often: Is it better to finance my equipment acquisition or to pay cash? And if the answer is finance, what type of financing should I use? There is no one-size-fits-all answer to this question, but today I’m outlining some benefits of financing equipment that might help make this decision easier for your business.
Of course, it’s important to note this decision often should include many considerations that are best discussed with a knowledgeable, relationship-focused equipment finance expert. Depending on your industry, how quickly the equipment needs to be replaced, and your current business outlook and financial situation, the best way to finance your equipment acquisitions might be completely different than someone else’s. In fact, the answer to this question may change for your organization based on certain dynamics or business cycles you may be experiencing.
Over the years, I’ve noticed that equipment leasing has gotten a reputation for being expensive and cumbersome. Throughout my career in equipment finance, I’ve found this most often happens when there’s a poor fit between the equipment and financing structure used, which is, again, a reason to speak with an expert who cares about the long-term growth of your business before you commit to a financing solution that may end up being more expensive in the long run.
Aside from bartering — does anyone still do that? — there are generally only a few options to obtain equipment: cash purchase, equipment loans, and equipment leases.
Acquiring equipment outright with cash might be your best option if your business has enough cash on hand. Although, just because you have it doesn’t mean paying cash is the best option to acquire expensive and potentially rapidly depreciating equipment.
Financing equipment through a loan or capital lease typically benefits your business when you plan to keep the piece of equipment for a longer period than an operating lease would normally last. Often, this works best when you’re acquiring equipment with which you don’t anticipate any technological or functional obsolescence issues.
An operating lease may make the best sense when you plan to replace or upgrade the equipment frequently and need flexibility. As an example, your business might lease a fleet of vehicles or laptops that you plan to replace in two years when you can take advantage of better gas mileage or more memory.
Advantages of Equipment Loans & Leases
Let’s take a closer look at benefits of equipment financing — loans and leases — which are my specialty. Here are some key points in their favor that apply to many companies:
- Impact on cash flow. Some equipment acquisitions can be very expensive, or also even unbudgeted because of equipment failure, market demand, or other unforeseen circumstances. Equipment financing is a fast way to get the equipment you need to best leverage technology and efficiencies that it offers. As you likely know, cash is king, and preserving it is especially important in many businesses, and not just to help business owners sleep at night. Loans and leases not only allow you to preserve your cash, help you manage your balance sheet, and they also often offer flexible payment terms that can work in your favor. Particularly if your business is in growth mode, it’s smart to save your cash for strategic acquisitions versus tying it up in rapidly depreciating assets.
Additionally, matching cash outflow of a lease or loan with the inflow from either revenue generating equipment or equipment that offers significant efficiencies (cost savings) is smart business.
- Lower initial expense. Again, with the cash flow — it’s important. The initial outlay to finance your company’s equipment acquisition with a lease often is almost zero. Many times, equipment leases require no down payment and offer 100% financing.
- Easier to secure. Leases are often easier to qualify for than loans, especially so if you’re heading up a company that’s in turnaround mode or if your credit has hit a bump in the road (hello, COVID-19?). It’s a way to start working your business back to the black by putting the equipment to work for you.
- Mitigate the risk of equipment ownership. While people like to talk about how quickly equipment goes obsolete, you should also consider other potential operational and functional obsolescence issues when determining the best way to finance new equipment. For example, a piece of equipment can be working fine and achieving its original intended purpose while changes in the direction of your business could render it obsolete. A lease can work as a hedge against various forms of obsolescence.
- Tax depreciation benefits. Section 179 is an expense deduction for business equipment that allows qualifying businesses to deduct the cost of some equipment as an expense instead of capitalizing it and depreciating it over a number of years. The Tax Cuts & Jobs Act of 2017 expanded bonus depreciation so that businesses can now take a deduction that equals 100% first-year depreciation on the qualifying equipment acquired between 2017 and before 2023. Depending on your need for depreciation benefit, a true lease can shift this benefit to the lessor, which is then passed on to the lessee in the form of a lower monthly payment. Through Section 179, which is outlined and regulated by the IRS, you could claim a portion of the cost of the equipment the same year you acquired it subject to certain limitations set by the IRS (consult your tax experts) . And the equipment acquired could potentially reduce your business’s taxable income if it qualified within the IRS’ code.
- Protection against inflation. With some leases or loans, you lock in an interest rate and pay your fixed payments while the price of the equipment continues to rise. With today’s unknown costs and economy, don’t undervalue this potential upside.
As I mentioned, I’m partial to equipment loans and leases because that’s my business, but I’ve seen it work all ways in many types of companies. I have also witnessed disaster deals that upended businesses and set them back. The important point is working with an experienced person who knows your business and your industry, is dependable, and isn’t just out to make one more transaction this month. Financing equipment is a bit of science and some art but finding the best way for your company to acquire equipment will absolutely pay off in the short and long run.
Let the Equipment Finance experts at First Business help you determine if it's better for your business to lease or finance your equipment.CONTACT US