Should You Take An Equipment Loans?

Last Updated: December 26, 2019

For a small business or a startup, it is always confusing to choose between equipment lease and equipment loans. Often, people do not know the meaning of equipment in a business. Before moving to equipment loans, it is important to understand “Equipment”.

Equipment is any tangible assets important for the operation of a business other than land, property or building. For example, desks or computers, printers, or perhaps an x-ray machine, everything is equipment. For different businesses, equipment might be different but the means of gaining equipment are always the same.

How to Gain Equipment for a Business?

It is simple. Every person can get equipment in the following two ways:

  1. by purchasing equipment, or
  2. by leasing equipment

Now, here the situation is tricky. Purchasing equipment and leasing the same are two different aspects of a business. The decision mainly depends upon the business, the availability of finances, future planning, and a few other factors.

Who Should Get Equipment by Leasing?

Equipment leasing is simply borrowing the equipment where the lessor has the ownership of the equipment. The lessor leases the equipment on behalf of a flat monthly fee. Leasing is a feasible opportunity only when a business is new and the business owner is having short of finances. It is a short-term solution only. In the end, the total amount of lease sometimes gets higher than the actual market price of the equipment.

Purchasing of Equipment:

Purchasing equipment is definitely a long-term solution for a business. However, to purchase equipment one needs finance. Often, for a small businessperson or a startup, getting ample finance is a big issue.

Here comes the option of equipment loans. Equipment loans are handy when the businessperson does not have optimal money to buy equipment. Before moving further, do you know the meaning of loan?

What is a Loan?

A loan is also borrowing, but it differs from a lease. A person can lease equipment but take loans in terms of money. There are numerous kinds of loans available in the financial market. Bank loan, personal loan, business loan, home loan, vehicle loan, and equipment loan are a few of the examples.

What is an Equipment Loan?

When a person borrows money from a bank, financial institution or moneylender to buy equipment, it is equipment loan. The borrower has to repay the loan amount in a fixed time. It also costs him a fixed interest rate to repay over the loan period.

Where Can a Businessperson Get Equipment Loans?

For a business, the equipment can emanate from many sources. It actually depends upon the creditworthiness of the borrower. Sometimes, the nature of equipment also decides the possibilities of the equipment loans. However, some prime sources to get equipment loans or machinery loans for a new business are:

  • Commercial banks for commercial equipment loans
  • Credit unions or equipment financing companies
  • Government approved SBA loan

Several online lenders or equipment financing companies are also helping big and small entrepreneurs to get easy equipment loans.

Should You Take an Equipment Loan over Equipment Lease?

As I said earlier, equipment loan and equipment lease both have their own significances, features, and pros and cons. Let’s compare both and decide which one is better?

Comparison between Equipment Lease and Equipment Loan:

  • Equipment lease requires a monthly or yearly rent payment as per the agreement between the lessee and lessor. While equipment loans require paying the loan amount as well as the regular fixed interest rate.
  • In an equipment lease, the lessee has no legal right over the equipment. Whereas, in the case of equipment loans, the borrower of the loan is the owner of the equipment.
  • In an equipment lease, the lessee has to return the equipment to the lessor after the lease tenure is over. However, in the equipment loans, the lender doesn’t get the equipment after the complete repayment of the loan.
  • In an equipment lease, the lessee has to pay the lease amount at the beginning of the first payment period. However, during the loan, the down payment is greater than the first lease payment. In addition, the borrower has to arrange the finances for the left out cost of equipment.
  • The lessee can pay the lease payment either in arrears or in advance. The equipment loan borrowers repay the loan payments in arrears.
  • In an equipment lease, the equipment itself acts as collateral. In the loan, the borrower has to submit the collateral to the lender based on its creditworthiness. It can be the current or fixed assets.
  • In the lease, the lessee can claim the tax deduction over the entire lease payment. However, on the loan, the borrower can only claim the tax deduction over interest.
  • The lessee needs not to bear the cost of depreciation of the equipment. It may simply get the new lease for the new equipment. The borrower has to bear the risk of depreciation or obsolescence of the equipment.

Collateral Security for Equipment Loans:

Collateral security often depends upon the amount of loan. Sometimes, the machinery or equipment is worthy enough to act as collateral against the loan for them. However, if you are having bad credit, getting an equipment loan can be harder than getting an equipment lease.

Bottom Line:

If as a businessperson, you can bear the expenses of the devaluation of the equipment, need the equipment for a long term/lifetime basis and have good collateral, going for equipment loan over equipment lease is a wise choice. However, for a small businessperson or a startup with a short-term or a fixed time requirement of equipment, an equipment lease is a much feasible solution.

Before opting for an equipment loan, do not forget to calculate the interest online through an equipment loan calculator. You also need to collect and submit the machinery loan documents to the lenders. Of course, machinery loan without security is not possible. It is better to arrange security or collateral before seeking the equipment loan.

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