Equipment financing is a loan specifically designed to pay for your larger business equipment needs. Some examples of this might include, commercial ovens, automated machinery, machine shop tooling, generators, chillers, large format printers, car wash equipment, trucks, trailers, commercial refrigerators, molders, agricultural equipment, or any other equipment that is or can be used by a business.
Deciding on Which Equipment to Finance
When you are looking to get equipment financing there are some factors to think about first. Commercial equipment financing is a loan to buy the equipment over a period of time. The lender uses the equipment being purchased as collateral. Financing the equipment is a sound option for expensive long-life equipment that is not going to become obsolete in the near future. This is because once it is paid off; you still get to use it as it still has value. Equipment you should not finance, for example, are computers and/or high tech machinery with short useful lives. This type of equipment is not a good option for financing because the equipment becomes obsolete very quickly, oftentimes just as or even before it is paid off. When it is paid off you may be left with a bunch an item, for example, that has little or no value.
Large industrial/agricultural or low tech equipment are much better examples of things you should think about when seeking to get equipment financed. This is because these types do not become obsolete quickly and therefore do not need to be replaced often. The advantage of equipment financing is that once your equipment loan is paid off and you own the equipment outright, then your business’s monthly cash outlays plummet. If that equipment still has a useful life then while you are using it your profit margins will go up. Also, the tax advantages can be good because when you buy the equipment through a loan you get to depreciated its value and deduct that depreciation off of your taxable income. In addition, the interest can be deducted from your taxable income.
The disadvantage of equipment financing through a loan is that while the fixed costs do drop in the future, they are high in the present. Not only do you have the monthly loan payments but a down payment is also usually required. If you are a new business without ready access to capital, it may be better to lease the equipment until you can afford to buy.