Companies from office-based businesses to manufacturing titans all need ways to access equipment. But since equipment can be expensive, it’s natural to wonder whether a loan is a good way to obtain equipment.
An equipment loan involves a lender extending money to a borrower to purchase equipment. Then, the borrower pays the lender back over time. Like any financing option, equipment loans have certain pros and cons, especially when compared to leases, which are more of a rental arrangement.
One advantage of using a loan to obtain equipment is that the equipment becomes the borrower’s property. That is especially attractive if the equipment projects are to be in use past the end of the repayment schedule. Once the loan is paid off, the company has an asset on hand.
Conversely, for equipment that may become obsolete shortly, a lease may be a better option. Purchasing equipment that won’t be relevant for long isn’t a great use of resources.
Maintenance and Training
Maintenance and training are two ongoing considerations when it comes to equipment. Purchasing equipment with a loan means you’ll need to pay to maintain it, but you also won’t need to train employees on new gear as frequently. On the other hand, many leases have maintenance included; however, the end of a lease means you’ll need to replace the equipment, and employees will require training on the gear that comes next.
Predictable payments are another perk offered by most equipment loans. By entering a loan agreement, you’ll be locking in a payment schedule that lets you plan your budget accordingly. Leases, too, may offer relatively predictable payments, but if you need to lease equipment again after an initial lease expires, rates may go up.
When it comes to payments, the one drawback of loans is that they often require a down payment. However, there is a silver lining: A bigger down payment can reduce monthly payments going forward.
Taking out a loan for equipment can set up an advantageous tax situation. Certain equipment loans may trigger eligibility for the business to use the Section 179 deduction, a helpful tax boon. Depreciation deductions may prove beneficial as well.
In the end, an equipment loan can be a great solution for certain businesses. For advice tailored to your specific business’s situation, get in touch with Lode Capital.