If your company needs equipment financing, then it’s important to understand the distinction between equipment leasing and equipment loans. This article goes over basic information as well as some of the advantages of each.
Equipment loans involve a lender extending a lump sum to a borrower. Those funds are used to purchase the equipment outright. According to Forbes.com contributor Richard Harroch, borrowers can expect to pay about 20 percent of the loan as a down payment. The equipment typically then serves as collateral to protect the lender while the borrower makes payments—usually monthly—to pay off the loan plus interest. The borrower owns the equipment at the end of the loan.
Equipment leasing—which is essentially renting the equipment—is also a way to get the gear your company needs. Like loans, leases involve monthly payments as well as interest rates. There are two main species of equipment leasing to be aware of: capital leases and operating leases.
Capital leases are somewhat similar to equipment loans, especially when it comes to the end result of the transaction. That’s because these are meant for situations in which the borrower wishes to purchase the equipment at the end of the lease. If the equipment business is leasing will be useful past the end of the lease, then a capital lease can be a very attractive financing solution.
Operating leases are more like a strict rental of the equipment. These are a good option for situations where the business may want to move on from the equipment at the end of the lease; for example, if a company is leasing laptops that will be obsolete in the near future, then an operating lease would let them move on to new equipment relatively soon.
All types of equipment loans and leases come with varying fees, interest rates, and monthly payment amounts. Work with your lender to find the best option for your business.
If you want to continue learning about financing and business, take a look at Fast Commercial Money’s other blog posts.