To Lease, or To Loan. That is the question
If you are looking to finance your next piece of business equipment, you need to decide if you are going to lease or loan. While both offer advantages, such as freeing up capital for other business needs and helping your business stay flexible with its finances, there are different aspects of a lease or loan that could better serve the needs of your business. Before deciding, you should be well educated on how a lease and a loan would each effect the finances of your business.
Leasing Business Equipment
The first thing to note is that when you lease equipment, you have no ownership of it. That being said, you need to check with the leasing company for information regarding who is responsible for repairs and whether or not you need insurance coverage for damages. If you choose to lease, there are two types of leases that you can sign: operating and capital. An operating lease is set up for payments that act as rental payments. This means that the full lease payments can be written off on your business tax returns. With a capital lease, you make repayments with interest. When it comes to taxes, you assume full ownership liability but you may still be able to write off the full payments as deductions. Some additional perks to leasing business equipment include no down payment, no collateral, no usage of credit lines and the ability to trade in obsolete equipment for the newest model at the end of a lease agreement.
If you use a loan to finance the purchase of the equipment, you assume full ownership responsibility. The equipment will be yours to keep when the loan has been paid off. You will have to pay an initial down payment on the loan and then monthly payments are made with interest. The interest that you pay is tax deductible and since you own the equipment, the annual amortization can be written off as well. Additionally, depending on how your credit is, you may have to offer up collateral in order to secure the loan. But, a loan can help to increase your credit exposure. The last thing to consider is that you can end up stuck with obsolete equipment if you choose to use a loan since you have ownership of the equipment.
There are pros and cons to both leasing business equipment and securing a loan to finance it. Determine what your business needs are and what would benefit your business most when deciding between a lease and a loan.1010