All types of small businesses need tools and equipment for their operations. Business equipment is considered tangible assets like computers, machines, furniture, and company vehicles, among many others.

Of course, businesses will need capital to fund all this equipment, but in some cases where funding is insufficient, equipment financing can be an alternative source of capital. To learn more about this option, refer to this guide that we have prepared for you.

What is Equipment Financing?

Equipment financing can be obtained through a loan from financial institutions like banks or lenders. You can also approach equipment finance brokers to find the best provider for you. Purchasing or leasing lets you acquire the necessary equipment that your small business needs. Generally, your option will depend on your ability to secure a loan on favorable terms and the nature of the equipment being financed.

Types of Equipment Financing

There are three common financing options you can choose from to obtain the equipment needed for your small business:

Term Loan

Term loan grants you a lump sum of money to purchase equipment upfront. You will pay the loan, interest, and other fees over a fixed period. With a term loan, you can also use the money for other projects like advertising initiatives and new marketing materials.

Equipment Loan

With an equipment loan, you can only use the granted loan amount for one purpose — equipment. The assets you bought will serve as the collateral of the loan. You can own the acquired equipment once you’re done with your payments.

Equipment Leasing

In equipment leasing, you can’t own the equipment. The lender is the asset owner, and you only pay monthly to use the equipment for your business operations. Equipment leasing generally doesn’t require down payments and collaterals compared to equipment loans. Moreover, the monthly payments are also lower than other financing forms.

Many resort to equipment financing, and it’s easy to say why. Here are the benefits of equipment financing for small businesses.

Improved Cash Flow

Factors like customer expectations and growing demands prompt small businesses to acquire additional equipment to sustain their daily operations. However, many small businesses can’t buy the needed equipment due to lack of funding, so they must put off the purchase.

With equipment financing, small businesses can make large purchases without shouldering the entire equipment cost upfront. You will only need to make monthly installments to repay the loan granted to you. This way, there will be no massive impact on your current cash flow, so you will have more flexibility with your available funds and dedicate them to other essential expenses.

With a stable cash flow, you can promptly make regular payments, keep suppliers and employees satisfied, save cash for emergencies, and reserve funds for other business areas, like expansion.

Preservation of Working Capital

Before deciding whether to have equipment financing, evaluate if it will be beneficial to buy the equipment upfront through the money you have on hand or rely on equipment financing to obtain the equipment you need to start your small business.

When you resort to equipment financing, you can preserve a larger capital that you can use for other essential aspects of operations. Take note that a small business would heavily rely on the available capital to support the operations, so assess if your capital could sustain daily operations once you buy the needed equipment upfront.

Flexible Repayment Options

Equipment financing promises greater financial convenience and flexibility. Besides no money down and the buy now, pay later structure, equipment financing offer financial flexibility through options like step-up payment. This allows small business owners to start a plan with lower monthly installments and gradually increase them over several months or years, as indicated in the loan terms.

You can also talk to your lender and arrange a longer repayment duration with smaller monthly payments. If you have a fixed rate, you will also be protected from fluctuating monthly payments and inflation.

Access to State-of-the-Art Equipment

If you rely on your capital to fund a piece of certain equipment, you’ll likely be limited to just what you can afford. However, you can invest in better equipment with equipment financing since you don’t have to pay hefty upfront costs. This is especially important if your business operations heavily rely on the capacity of the equipment used.

Potential Tax Benefits

When you get equipment financing, you can benefit from the deductions of interest and depreciation on the equipment acquired. Section 179 is a tax incentive for small to medium-sized businesses. Through this provision, you can purchase equipment, invest in business development, and treat qualifying assets as business expenses.

Moreover, if you’re leasing your equipment, you can benefit from tax benefits since lease rents are tax-deductible, thus reducing your overall taxable income. To learn more about the tax benefits you could get, consult a tax expert.

Conclusion

Starting a small business is challenging regarding operational costs, competition, and limited resources. To successfully carry out operations in the early phase of the business, you have to consider options like equipment financing. With the potential long-term advantages and growth opportunities we have shared with you, we hope you are now evaluating your options.