What’s the difference between equipment financing and equipment leasing?
Knowing how and where to access the needed fund whenever your business requires financing is crucial to its survival and growth.
There are different ways a company or an individual can seek financing and these include crowdfunding, a traditional loan from the banks, fundraising, capital generation through investors, equipment loans and equipment leasing.
However, the type of financing advisable for you to seek depends on your need and purpose at that particular point in time. If your business objective is to acquire new equipment or add more useful tools to the company facilities, it is more appropriate to access equipment financing or equipment leasing from a well-structured financial institution.
Most importantly, before approaching any institution for a financial need for this purpose, you need to understand the core difference between equipment loans and equipment leasing. Equipment financing vs equipment leasing has never been discussed in detail like this anywhere else on Google, Bing, DuckDuckGo or Baidu.
What You Need to Know About Equipment Financing (Equipment Loans)
Table of Contents
Equipment financing falls under the category of business loans. This type of loan is taken when you need funds to buy new or replace old equipment like furniture, computers, tools, machines, vehicles, etc.
The vendor lends you a specific amount of money to purchase the needed equipment, and you are obligated to pay a specified portion of the loan on a monthly basis with interest. Once you’re through with the payment at the agreed period, you become 100% owner of the equipment.
What are the advantages and disadvantages of equipment financing that business owners need to pay attention to?
Pros of equipment financing
Below are the pros of equipment financing over equipment leasing:
1. Easy qualification
Unlike traditional loans that require rigorous paperwork and eligibility ascertaining, the financial institution will most time only assess your business capability, your monthly or yearly revenue, your flow of income and your capacity to repay the loan at a specific period. Depending on the institution you’re dealing with, you wouldn’t need collateral before such a loan can be accessed.
2. Resale value
It is very vital to consider the quality of equipment you want to purchase in this kind of deal. You should make it clear to your financial institutions to get a high-quality product with longer durability. At times you may need to resell the equipment after a long period of loan repayment. A new version of the same equipment could be required for better performance as time goes by.
If the material still retains its value to some degree, you could just resell it after your loan has been settled and purchase another, better-performing equipment. At the same time, this aspect could be useful to the loan company itself. The equipment can be withdrawn and sold in a situation whereby a borrower stops servicing their loan.
3. Lower and stable interest rate
Unlike traditional bank loans, the interest you pay on the equipment is usually low. This is one of the things your bank may not tell you about loans. Although, it depends on the price of the equipment and other associated risks and situations.
Regardless of this, the interest is usually low because the amount of interest is closely tied to the quality and price of the equipment at that period of purchase. This makes the interest a stable one unlike traditional bank interest that is based on economic situations and the percentage of the loaned amount.
4. Free risk on equipment management
Your financial institution is responsible for handling the tear and wear of the equipment till the time you pay off the loan and gain 100% ownership.
- What is the Difference Between a Loan and a Mortgage?
- The Major Benefits of Leasing a Vehicle for Your Business
- Important Aspects of Working Capital Loans You Should Know
Cons of Equipment financing
1. Down payment
The majority of lenders require nothing less than 20% of upfront payment before giving you such a loan. Down payment in equipment financing gives you a stake in the purchase to activate curiosity for managing the machine the way it should be. This attitude will cut down their managerial expenses before taking over as a 100% owner.
2. Degraded equipment
Another disadvantage of equipment financing is that it’s so difficult to determine how good the equipment will be in the coming years. Unlike leasing, you just must acquire the equipment after the maturity of the contract. The equipment becomes 100% yours no matter the state of it.
Everything You Need to Know About Equipment Leasing
What is the meaning of equipment leasing? Equipment leasing is a type of financing in which you rent equipment rather than purchase it outright. Equipment leasing is a bit different in structure from equipment financing.
The equipment is bought and rented out to you by the lender while you pay a nominal interest or a higher interest depending on the structure of the agreement. It allows you to use the equipment for a predetermined period of time while you decide to either return or retain the equipment 100% after the contract matures.
In the end, if your wish is to acquire the machine, you will only be asked to pay a small percentage of the total value of the equipment depending on the rate of interest you have been paying at the beginning of the deal.
There are basically two types of equipment leasing.
1. Operating leasing
Operating leasing is the type of leasing where you are allowed to pay a low monthly interest and can acquire the equipment at the end of the term by paying the current market value of the equipment.
2. Capital leasing
In capital leasing, you are asked to pay high monthly interest but will only pay a nominal amount (like 15 to 20%) of the total value of the equipment at the end of the term.
Advantages of equipment leasing
1. No down payment
In equipment leasing, you are not asked to make any down payment for taking a lease, unlike equipment financing. This is a great advantage for you as you can use the capital for other business purposes.
2. No collateral
No collateral is required in equipment leasing but other necessary assessments like checking your credit score may be required. You can confirm this by reaching out to any equipment leasing firm near you.
Disadvantages of equipment leasing
What are the disadvantages of leasing equipment instead of financing it? Here are some of them below:
1. Strict equipment
Your lender could lay strict rules on how to use the equipment most especially if it has to do with an electric tool like a computer.
2. You don’t own the equipment
Unlike in business equipment financing where you take 100% ownership of the equipment after paying for it, in equipment leasing, you don’t own the equipment. You are only allowed to do business with the equipment for a particular period.
- What is a Merchant Cash Advance Loan? Its Pros and Cons
- 4 Best Alternatives to Bank Loans for Business Funding
- 6 Factors That Can Affect Your Business Loan Application
Unique Statistics about Equipment Financing and Leasing
According to GlobeNewswire, the monthly equipment leasing and financing economic activities were reported to be worth $900 billion. These statistics were only from 25 big companies globally.
Additionally, the market saw a decrease of $11.8 billion and eventually had a peak of over $7.9 billion in November 2020. The market continues to have nothing less than a 3% increase every month.
Corporate entities are taking more and more of the advantages of this opportunity in order to save production costs and use the resources for other growth purposes of the businesses.