As South Africa claws its way out of a recessive economy, manufacturers are gaining confidence once more and investments are returning to fuel growth. But other responsible financial decisions need to be made if owner or shareholder capital is to be preserved. Financing equipment, for example, through a lease or loan can help save precious capital that can be put into other areas of business.
So, how does equipment finance work? It’s important that you, as a business owner, know as much as you need to about financing through a lease or loan. Each has its own advantages and disadvantages. In evaluating your options, you’ll need to look at each to determine how balance between usage, cash flow and your financial objectives can be struck. To determine the most appropriate option, consider a few choice questions.
How long with you need the equipment for?
As a rule of thumb, equipment that you’re only expecting to use for the short term (36 months or less) should be leased. If you’re using equipment for a longer period of time, then either lease or loan are viable options.
How much can you afford to spend?
As with any ongoing business expense, you’ll need to consider the monthly costs to running, maintaining and storing your equipment and how that fits into your budget. In general, leasing will leave you with affordable monthly payments.
How quickly will the equipment become obsolete?
Leasing equipment protects you against obsolescence, since the risk of obsolescence is assumed by the lessor. Certain lease financing programmes allow for upgrades or maintenance within the terms of the lease agreement.
How versatile is the equipment you’re using?
The question here is whether or not the equipment is going to be used across multiple projects. Equipment’s purpose is to enable revenue production. Therefore, if a piece of equipment has limited use within a specific contract and isn’t necessary for other projects, then it’s not ideal to have it sit idle while you continue to make payments on it. A lease allows you to stop the equipment expense when it ceases to be used in a project.
What’s the upfront asking price?
Leasing is usually quite flexible in its financing options, covering expenses involved with transportation, delivery, installation, testing and training. Loans are typically more rigid than this, often requiring a down payment that excludes other cost benefits. It’s important that you know the cost of the down payment and consider the cost to benefit for using company capital on this.
How will your working capital be affected?
Many businesses will have a line of credit through a bank to use on inventory purchases, business improvements and similar capital expenditures. Depending on the lending terms, it’s often possible (and even preferable) that this working capital remains isolated from equipment costs in favour of receiving finance through a third party equipment finance provider.
How flexible are the financing terms?
A lease certainly provides greater flexibility, since it can be structured around a plethora of contingencies. A loan is far less flexible, inasmuch as it’s subject to the lender’s rules. In addition, a lease will stop expenses when the equipment is no longer necessary.
Will you be needing additional equipment?
If you’re planning on growing your business, then a lease may be a more favourable option since it’ll allow you to acquire multiple pieces of equipment under a number of schedules with the same basic terms and conditions. Again, this offers for more convenience and flexibility than a conditional loan contract, which will almost certainly need to be renegotiated in the event that more equipment needs to be acquired.
Who can help me decide which is the better option for my business?
A decision between a lease and a loan is certainly a big one and should be approached responsibly. It is recommended that you consult your business’ accounting department/person and draw on the resources of your bank or equipment financing provider to help you secure the best possible terms for your lease or loan.
So, what’s the difference?
Equipment leasing is basically a rental agreement. Essentially you lease equipment for a predetermined monthly cost. At the end of the lease, you’ll have the option to purchase the equipment for longer term use.
An equipment loan, on the other hand, is similar to a business loan in that a lender approves you to receive a lump sum loan, based largely on the value of the equipment. You’ll then need to pay back this loan (and then some) over a period of time.
So if you have money to throw around and intend to use the equipment for a long time, then a loan may be the right way to go. But if your wallet is strapped and the equipment you intend to finance will quickly become obsolete, then you may want to consider leasing instead. Hopefully this article shed more light on your questions surrounding equipment finance and that your business choices are beneficial.