Efficient Equipment Leasing Companies Vs Bogged Down Bank Loans
One of the oldest principles in business is that it takes money to make money. A new piece of equipment can allow you to greatly increase your capacity for production. But it can also cost much more than you have on hand. You can usually go one of two ways: you can lease the equipment, or you can get a bank loan and purchase a new unit outright.
Many people think this is the best way to go. It gives the capital you need to buy brand new equipment without worrying about any regulations from equipment leasing companies. But if you look more closely, acquiring a loan carries its own issues. Here’s why you should think twice about getting a bank loan.
Higher Payments?
One of the biggest reasons people decide to choose a bank loan over an equipment lease is because the payments are cheaper.
And while the number on the monthly payment might be cheaper than the monthly payment of a lease, that doesn’t tell the whole story. First, you have to consider the down payment. While the exact percentage of the down payment varies due to the type of loan, amount of the loan, and your credit, it is often as much as 20% of the total loan amount.
Then, you have to consider the term of the loan. The monthly payment may be lower than that of an equipment lease, but you may end up paying that monthly payment for longer. Many business owners look at those factors and shrug it off, thinking that their tax credit will cover it.
But that’s not completely true.
About Those Tax Breaks…
It is true that when you purchase a piece of equipment, you can deduct the whole amount from your income, lowering your overall tax liability.
But, that is only a one-time deduction. Every other year you own the equipment, it will be considered an asset.
On the other hand, payments to equipment lease are also tax deductible, and while they might not have as large a benefit as that initial purchase price, that tax benefit continues every fiscal year that you’re leasing the equipment.
The other thing to consider when purchasing a piece of equipment is sales tax.
When you purchase equipment using a bank loan, all of that sales tax is due at the time of the sale. This is in conjunction with the down payment. Suddenly, your initial payment is much more than you originally anticipated.
No Guarantee of Approval
Even if you still decide to go with a bank loan, you might not even be approved.
The unfortunate truth is that banks decline as much as 80% of business loan applications.
If you’ve been building projections around this new piece of equipment, this rejection can stop you dead in your tracks, undoing months of planning.
Even if you do get approved, it will only countless rounds of paperwork, with the potential for delays at each turn. Often, your company’s credit will be tied up until the approval process is completed.
On the other hand, leases are much easier to qualify for. The turnaround time from application to approval is much shorter, which means you can get to work faster.
Ownership Comes At a Cost
One of the biggest reasons business owners prefer to purchase the equipment outright is ownership.
At the end of their loan term, they own the unit outright. They don’t have to pay anything else to keep it. They don’t have to worry about adhering to the use policies of a lease. It is theirs to do what they will with it. But this ownership might not be as convenient as you think. For one thing, sole ownership means that you are solely responsible for maintenance and repair.
This means spending man hours training your staff on how to maintain and repair the equipment. And while having an in-house staff ready to fix any problems might be more convenient than scheduling around the leasing company’s maintenance team, the time you spend training your team can be spent doing more productive tasks.
Even when they are fully trained, it’s unlikely that your team will have the same level of expertise as a maintenance team that specializes in that unit. And in the event that your unit is beyond repair, you can only count on the manufacturer’s warranty—if there is one. You have to eat the cost of that unit, and the replacement.
Obsolescence
Technology moves fast. And by the time you’ve paid off your loan for your equipment, someone has introduced a new alternative that’s faster and more efficient.
You could try to get another loan and go through the process all over again, but then you’re still sitting on the old equipment. You could try to sell it second hand, but demand will certainly be diminished with the release of a newer alternative.
What About Equipment Leasing Companies?
When you lease equipment, you never obtain full ownership of your equipment. At the end of the lease, they retake possession of the unit.
However, you can then start another lease on a newer, more efficient piece of equipment. You never have to deal with obsolete, broken down equipment again.
And since leasing companies don’t require a down payment, don’t require sales tax, and don’t have lengthy approval processes, you can keep production running as seamlessly as possible.
Need A Lease?
If you’re looking to upgrade your business’s equipment and need capital, why not trust one of the best equipment leasing companies in the business?
We have helped hundreds of companies in various industries acquire equipment and funding, and we’d love to add your business to that list.
Contact us today for a quote.
