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Financing Equipment for your Business

Kevin DiGiacomo
Senior Vice President, Group Manager
[email protected]
(585) 419-0670 x50640

You have found the perfect piece of equipment or vehicle for your company and now have a number of decisions to make. Do you pay cash or finance the asset? If you finance it, do you take out a loan or a lease? For how long? Do you obtain a fixed interest rate or a variable interest rate? Let’s breakdown some of the key questions when it comes to financing new equipment for your business.

Cash or Finance?

There are some benefits to paying in cash including less paperwork, no underwriting requirements, or submission of financial information. You will immediately own the asset free and clear of any liens and will not pay interest on a financed loan. Beyond simplicity, paying in cash usually does not provide much of a benefit over financing.

The benefits of financing equipment and/or vehicles include:

  • Preserves your cash – always important to have on hand for unexpected needs or opportunities that arise.
  • Keeps Lines of Credit available – necessary to keep open and available to meet your day-to-day cash and operating needs.
  • Easily manage cash flow – paying for equipment and vehicles through a monthly loan payment matches the cash in flows that are generated from the use of that asset with the cash outflow of the payment.
  • Flexibility – keeps the option open to pursue new business opportunities.

Loan or Lease?

Leasing allows you to try out the equipment/ vehicle without making a long-term commitment. If the asset does not meet your needs, you can return it at the end of the lease. This is a good option for assets that quickly become obsolete due to advances in technology (i.e. computer hardware, software, and communications equipment). Continuing to lease those assets allows you to upgrade so you can remain up to date with the newest technology.

On the other hand, purchasing the asset provides you the ability to build equity. Much like a decision to buy a car, the value of the car after your final payment has been made represents your equity. You have the option to sell it for cash or you can use the value of the vehicle toward a trade in for a new(er) model.

A good rule of thumb is if the asset’s useful life to you exceeds 3 years, purchase it. If it’s less than that, then you may want to consider a lease.

How long?

The loan term represents how long it will take you to repay that debt. For business equipment or business vehicles, loan terms typically range from 3-5 years, although for assets with longer useful lives and that retain their value longer, a lender may consider a term of up to 7 years. When determining how long of a loan to obtain, you want to ensure the useful life of the asset and the term of the loan align.

Fixed or Variable Interest Rate?

A fixed interest rate will remain the same throughout the life of the loan, as will your monthly payment. This provides predictability for budgeting and forecasting your cash needs. With a variable interest rate loan, your interest rate can, and likely will, change during the life of the loan. Variable interest rate loans provide additional flexibility in terms of the ability to make early principal payments to pay off the loan prior to maturity.

Line of Credit.

If you intend to purchase multiple pieces of equipment and/or vehicles within 12 months of each other, another option is an equipment Line of Credit to finance those purchases. This type of loan provides a period at the beginning in which the loan is an interest only draw period. An equipment line of credit provides the flexibility to make draws on the loan to purchase the assets as needed with monthly interest payments only on the amount that has been drawn to date. Once you acquire your final asset, the loan converts to principal and interest payments for the remainder of the loan.

It is important to speak with your accountant and financial services representative about these decisions. They will guide you through the process to help determine what is the best financing structure for you and your business is. It is an important decision because you want to make sure you have enough cash on hand to meet your short-term obligations including payroll, accounts payable, etc. The sooner they know about these opportunities and decisions, the more time they have to help you navigate the decision process.

Call our Commercial Lending Team today at (585) 419-0670 to discuss your equipment financing options.

©2022 Broadridge Investor Communication Solutions, Inc. All rights reserved. This material provided by Kevin DiGiacomo.