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.
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.
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.
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.
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.
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.