How to Obtain Equipment for Your Business When Cash Flow Is Low
Purchasing equipment is one of the most expensive things you can do for your business. Most business owners, especially those just starting out, don’t have the working capital on hand to buy equipment outright. For this reason, a number of new business owners turn to equipment financing to help you purchase the items they need when cash flow is low. It is easier than you might think.
Some Business Owners Use Loans
Some business owners use loans as their method of equipment financing. When taking out a loan, the owner must use it expressly for purchasing equipment, which doubles as the security for the loan. This means if you default on the payment, the lender will collect the equipment instead. There are advantages and disadvantages to taking out a loan. While it is an excellent choice for people who need long-term equipment that they can’t afford to buy outright, lenders may require you to pay a down payment and interest could cost more than you expect.
Other Business Owners Sign Leases
For some business owners, signing a lease is a better choice for equipment financing. Leasing is a better option for people who need to upgrade equipment often or who cannot afford to pay a down payment. When you sign a lease, the leasing company technically owns the equipment, and many of them will provide maintenance, upgrades, and other services for the duration of the lease. Lease arrangements vary, but usually, you’ll take ownership of the equipment at the end of your contract. Lease contracts typically have low monthly payments and fall into three categories:
- $1 Buyout – These types of leases allow you to make regular payments for a set term. When your term is up, you can purchase the equipment for $1.
- 10% Option – This option works much like the $1 buyout, except you purchase the equipment by paying 10% of its fair market value. These leases often have lower monthly payments.
- Fair Market Value – FMV leases are much like the first two options. These ones usually have the lowest monthly payments, but they require you to purchase the equipment for its FMV at the end of the contract.
Deciding Between the Two
When deciding whether to use a lease or a loan for your equipment financing needs, you’ll need to consider several factors. Do you have a down payment of at least 20%? Can you afford the monthly payments? You’ll also want to consider how long you’ll need the equipment and how long it will last before it becomes obsolete. By keeping these factors in mind, you can be sure that you choose the right options to meet your company’s needs.