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| Equipment Financing and Leasing |
If you need new equipment for your business, chances are you're thinking about financing or leasing it.
It's important to look at these options, as they can be the tools of affordability to manage cash flow.
There may also be tax benefits or other reasons for financing or leasing equipment.
Financing means taking a loan out to buy equipment. The lender will take what's called a security interest in the equipment, which means that the equipment is collateral for the loan.
This will give the lender a lien on the equipment, with the right to repossess it if the borrower defaults on the loan.
A lender will do what's called perfecting the lien by following the rules of the Uniform Commercial Code (UCC), filing a financing statement with the Secretary of State in the state where the equipment is located. The UCC financing statement is a public record that puts other creditors on notice of the lien and gives it priority over any subsequent claims made on the same equipment.
Leasing means renting equipment rather than buying it.
The business owner who is leasing the equipment is the lessee.
The bank or financial institution that is renting the equipment to you is the lessor.
Legal title to the equipment stays with the bank, but you have the right to use the equipment according to the terms of the lease. The bank has the right to keep the equipment at the end of the lease term, unless you decide to "buy out" the lease.
Lenders and other finance companies have become so creative with financing and leasing arrangements that it has become difficult to tell the difference between the two. Still, there are some important distinctions:
Financing
- You actually buy the equipment, which means that you get to keep it after the loan is paid off. You don't have a residual value or "buy out" charge as you would on most leases.
- You may have more flexibility to refinance or pay off a loan early, as compared to trying to buy out or terminate a lease.
- Interest rates on a loan may be more favorable than the financing charges on a lease (or at least more understandable).
- There may be fewer limitations on use or operation of the equipment.
- There will be fewer unexpected charges at the end of the loan term.
- There may be relatively fewer penalty clauses.
- It may be cheaper to insure financed equipment versus leased equipment.
Leasing
- You do not have to pay the full purchase price of the equipment. You only pay for the cost of renting the equipment for the period of time you use it. This keeps monthly payments down, which improves cash flow.
- You may be able to expense some or all of the lease payments, and realize any tax benefits sooner than equivalent payments on equipment that is purchased (which must be depreciated).
- Terms might be more flexible to accommodate the needs of your business.
- Can help you to avoid obsolescence by being able to use equipment for the term of the lease and then rolling into a new lease with upgraded models (for example, with computers).
- Some leases may not have to be "capitalized." This may help an already debt-laden company show a better financial picture if the lease doesn't have to be listed as a liability on the balance sheet.
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