One of the trickiest parts of running a business is managing the finances. You have to make sure your prices are low enough to be competitive while staying high enough to cover your costs. You also have to make sure you have all the equipment you need while making sure everyone gets a solid paycheck at the end of the day.
If you’ve been struggling to get the equipment you need, there are lots of equipment finance options you can look into. Read on to learn more about these options and discover which one is best for you.
What Is Equipment Financing?
When you’re running a business that relies on certain equipment, you may find yourself in something of a catch-22. You need a new piece of equipment to increase your company profits. But in order to afford the new piece of equipment, you need to increase your company profits.
Equipment financing can help you get the equipment you need to grow your business before you have the capital to pay for it. This financing usually comes in one of two forms: loans or leases. We’ll dive into the different options and the pros and cons of each in a moment.
Renting vs. Buying
Before we get too far into different equipment financing options, you may be wondering why you have to buy the equipment you need. After all, in many cases, you have the option to rent the piece you need, which can get you the capability you need to grow your business. Then once you have the funding, you can buy the equipment outright, can’t you?
While this is certainly an option, it’s not one we’d recommend. Sure, renting may be cheaper on the front end, but the time you spend paying rent is time you could be spending growing your equity in the equipment. Why pay rent that gets you nothing for five years when, in the same five years, you could own the equipment you need outright?
One of your main options for equipment financing is taking out a loan. Equipment financing loans work like small business loans, with the amount you qualify to borrow depending on the price of the equipment you’re buying. The equipment itself serves as collateral for the loan, so if you default on the loan, the lending company will get to take your equipment.
You can get an equipment loan through a traditional bank or an online lender. Traditional banks offer reasonable interest rates and loan terms, but they tend to have very strict credit standards. Online lenders are a little more flexible and can provide you the loan you need on your terms.
Equipment Finance Agreement
You may also choose to go with a lease for your equipment rather than an outright loan. Leasing differs from renting in that the money you’re paying to borrow the equipment may go towards you eventually owning the equipment. But unlike a loan, you often don’t have to pay interest with a lease-to-own agreement.
An equipment finance agreement is the form of lease that looks most like a loan. Like with a traditional car payment plan, you take ownership of the equipment at the start of the loan and then pay the lender back on a monthly basis. If you fail to make a payment, you lose your right to continue using the equipment, but in the meantime, you are responsible for any liability issues related to the equipment.
Fair Market Value Lease
You may also be able to get a fair market value lease, sometimes called an operating lease. This option looks most like a traditional lease, with the lender agreeing to let you use the equipment for a period of time for a fee. At the end of that period of time, you have the option to renew your lease.
But at the end of the lease period, you also have the option to buy the equipment. And with a fair market value lease, you can buy the equipment at the current market value, rather than its original market value. Depending on how quickly a piece of equipment depreciates in value and how much your lease charges, you may be able to save some money on the equipment with this option.
$1 Purchase Option Lease
A $1 purchase option lease works a little more like a loan than a fair market value lease. In the beginning, the lender allows you to use the equipment for a monthly fee. These fees may be a little higher with a $1 purchase option lease than a fair market value lease.
But at the end of the lease term, you have the option to buy the equipment you’ve been using for $1. The agreement is effectively that you pay for the price of the equipment over the lifetime of the lease rather than all at once at the end. This option is better for equipment that holds its value more over time.
Ten Percent Purchase Option Lease
If you like the sound of the $1 purchase option lease but you aren’t sure you can afford the monthly payment, the 10 percent purchase option lease may be a great option for you. This lease works much the same as the $1 purchase option lease does. You lease the equipment for a period of time, at the end of which you buy the equipment.
But instead of buying the equipment for $1, you buy it for 10 percent of the equipment’s value at the start of the lease. This is a price you and the lender agree on at the beginning of the lease. This higher purchase price at the end of the lease means lower monthly payments, making it a good option for companies that are still building their capital resources.
Discover More Equipment Finance Options
Buying equipment can be expensive, and it can be hard to raise the capital to buy what you need outright. Equipment finance options can give you a way to get what you need to grow your business without breaking the bank. Whether you get a loan or lease to own, you can find an option that works for your finances.
If you’d like to get help with equipment finance options, check out the rest of our site at AV Tech Capital. We provide lease equipment financing for all industries and equipment types. Contact us today to start getting the equipment you need at the price you want.