Equipment is essential to any type of business. From heavy machinery to an office calculator, sourcing funds for equipment can be challenging. Concerns about cash flow and capital can affect equipment purchases. For businesses that want to spread their equipment spending evenly, financing is the best option for them. Since the purchase cost is spread over a certain period, it helps them acquire the equipment they need for their business.
Although financing equipment can be more expensive compared to buying it outright, it helps companies save more by allowing them to maintain their cash flow. Financing also helps manage risks until desired returns are achieved. However, some entrepreneurs still prefer buying their equipment outright because they own the asset. No more long-term agreements to worry about. Since they both have their advantages and disadvantages, which option is better for business: financing or purchasing?
Why finance equipment?
Equipment financing was designed to help entrepreneurs purchase equipment to help run their businesses. Computers, furniture, machinery, and even honey keeper extractors are forms of equipment financing. Companies that are concerned about their cash flow will stand to benefit from financing. They can ask for a 100 percent financing option with no down payments. Also, this lets them maintain their cash and use it to improve the other areas of their business.
Technology keeps businesses competitive, and owning obsolete equipment can be a concern. Companies that rely on technology need to acquire modern equipment to run their business. Financing can help them upgrade their equipment and dispose of out-of-date business equipment.
Products and services can also be bundled with the financing scheme. Ancillary products, training, software updates, installation, and maintenance can be rolled into one, easy solution.
Why purchase equipment?
Gaining ownership of equipment is one of the benefits of purchasing equipment. Office furniture or delivery trucks, for example, have long useful lives. They do not run at the risk of being outdated in the future. Depreciation deductions are given as tax incentives for business equipment. It helps companies save on taxes to increase their working capital. However, not all equipment purchases are covered by these incentives.
Purchasing equipment outright also has its disadvantages. Higher initial expenses can lead to credit lines being tied up in debts. They can affect a business’s cash flow and restrict future growth. Disposing of outdated equipment can also affect a company’s budget. After two years, a $10,000 equipment might only sell for $4,000 on the market. Being stuck with it can be a huge financial disadvantage.
Purchase or finance equipment?
The net cost of particular equipment helps businesses decide on what financial step to make. Possible tax incentives, its resale value, and intangible factors such as the equipment going obsolete should also be included in their calculations. Companies with larger and more stable cash flows will benefit from outright purchases. On the other hand, businesses with limited cash flow or capital can leverage equipment financing. The key is to determine what financial approach is more cost-effective in the end.
Financing and purchasing equipment both have their benefits and costs. Companies need to understand their needs to choose the best option for their business.