These days, financing solutions for small businesses have become more flexible than ever. Things aren’t black and white anymore. There are numerous options for each type of equipment you want to obtain. There are even different kinds of leasing and equipment financing programs that adapt to your specific needs. How can you choose the right method of financing?
Understanding Equipment Financing, Leasing, and Hybrid Options
Getting an equipment loan to buy is called financing. This works similarly to a real estate loan. The lender buys your equipment for you and lets you use it while you make payments. All of your money is going towards repaying the loan for that purchase, and once you finish, you’re free and clear. No more payments, ever again.
Leasing is a little different. In this case, the lender owns the equipment and lets you use it in exchange for a monthly payment. This is closer to renting an apartment or a rental car. At the end of the lease, you can upgrade to a different piece of equipment or choose another option. You don’t own the equipment.
Hybrid financing combines the best of both worlds. This is also known as lease-to-buy financing or a lease buyout. You get the benefits of leasing, but at the end of the term, you can still choose to own the equipment. The price of this option depends on whether you go with a $1 buyout, fair market value (FMV), or 10% of the original purchase price buyout.
Selecting Monthly Payments
One of the biggest differences between equipment financing, leasing, and lease-to-buy programs is the size of your monthly payment. Equipment loans are always going to cost you more upfront but save you a lot of money in the long run. For many businesses, that’s a perfect fit worth the investment, especially when heavy machinery is going to be used for 10–20 years.
What if you need to keep your operating expenses low, perhaps because you’re just getting started in business? In that case, leasing is attractive. It offers lower monthly payments, and you still get access to high-quality equipment that saves you time and money. Lease-to-buy, as you may expect, falls in between.
Making Your Choice
You can customize different details on any loan or lease, including the size of the down payment or the final payment. There’s always a tradeoff with interest rates, down payment, and length of repayment. This gives you the freedom to pick the best option for your needs.
