Pros & Cons of Equipment Financing

Whether you’re running a million-dollar enterprise or just starting out, it’s likely that at least one piece of equipment plays an integral role in how your business functions.

Unfortunately, most equipment is expensive, and with countless other business expenses you must afford, it might be too costly for you to purchase. Luckily, business owners can turn to equipment loans for their financing needs.

What Is Equipment Financing?

Equipment financing is the use of a loan or lease to purchase or borrow hard assets for your business. This type of financing can be used to purchase or borrow any physical asset, such as a restaurant oven or a company car. There is an enormous number of variations on equipment financing that cater to specific types of businesses and equipment.

Deciding if an equipment loan is right for your business will depend on several factors. However, if you’re reliant on expensive equipment to run your business, equipment financing could be a viable option.

The Pros of Equipment Loans

  1. Full ownership of the equipment after the loan has been repaid – this is a big reason business owners choose equipment financing. This is particularly useful for equipment that has a long shelf life such as farm machinery, restaurant, and office furniture, unlike other equipment that could become technologically outdated.
  1. Resolve cash flow issues – splurging on a big purchase can heavily disrupt your cash-flow, but through equipment financing, you’ll be able to spread the cost out and resolve cash flow issues.
  1. Tax breaks – another big equipment financing benefit is that if the equipment is 100% for the use of your business, you’ll be able to get a hefty tax deduction.
  1. No collateral needed – the equipment itself will serve as collateral should you default and become unable to meet your payments, so there’s no need to provide upfront collateral and risk losing it.
  1. Flexible payment scheme –the kind of payment scheme you want will depend on your lender, but it can be anything from monthly to annual. Be sure and build up a good relationship with them so that they know how much flexibility is best for YOU!
  1. Quick Funding – get the equipment you need promptly. With equipment financing, you can get your hands on the funds as soon as 24 hours, though this depends on the lender you go with.
  1. Increase Your Business’s Future Sales – an equipment loan could improve your business’s overall productivity. You’ll be investing in your business and may even be able to earn more money in the long run.

The Cons of Equipment Loans

  1. Usage Is Restricted to Equipment – equipment loans can only be used for equipment. That means you won’t be able to use the proceeds from an equipment loan to cover payroll expenses, rent, or anything else. Other types of additional working capital, like a merchant cash advance or lines of credit give you the flexibility to use the financing as you see fit.
  1. Ownership of Equipment – while listed in the pro section, outright owning the equipment can be seen as both a positive and a negative. For equipment that can depreciate quickly, like computers and software, it may be better to use equipment leasing rather than financing. Or if you know you will only need the equipment a short period of time, it would make more sense to use equipment leasing.
  1. Equipment Responsibility – if anything should happen to the equipment, you are responsible for all of the maintenance costs. This comes hand in hand with owning the equipment.

Is Equipment Financing Right for You?

Unlike many other types of financing, equipment loans are meant for a particular purpose. While that prevents these loans from being versatile, for the right person, equipment loans can be highly effective. You can’t decide what is best for your business without conducting some research, understanding your needs, and determining the type of equipment your business requires. A lot goes into this process, make sure you have all the information you need to make the best decision for your business.