Even during today’s economic volatility, many companies need capital equipment, but they must pay more to finance it. There are many options, though, for either leasing, fee per use or securing a loan.
Here are some things those companies can consider:
Leasing
Businesses of all sizes often choose to leverage equipment leasing, partly because the value comes from using the equipment – not owning it. Leasing provides increased flexibility, particularly when future upgrades are anticipated. Leasing is also a predictable expenditure, as the equipment expenses simply become a monthly line item. (Companies can ask tax advisors whether that could lead to tax advantages, such as having the lease payments be considered business expenses). This could help control cash flow, allowing companies to conserve capital and reserve credit lines for other needs.
Interest rates are still near historic lows, but they’ve been rising, and they’re widely expected to rise further. That means companies might choose to lock in long-term rates before they rise further. With supply chain challenges, however, it might take longer than expected to install the equipment. In that case, lessees should explore options to lock in rates now and delay making monthly payments until the equipment gets fully installed.
Popular options include a fair market value lease (true/operating lease) or a $1 buyout (capital/finance lease). As fair market value leases tend to have lower monthly payments, they may be considered an operating expenditure. This option helps mitigate the risk of technological obsolescence, but companies won’t know until the end of the lease how much it would cost to buy the equipment if they choose to keep it.
The $1 buyout leases (capital/finance leases) help companies buy equipment that will be useful even after the lease runs out, which could allow lessees to take advantage of tax deductions that might come with bonus depreciation. These payments would likely be higher, though, because the full cost of the equipment is spread over the chosen term.
Fee Per Use
Consumption-based agreements charge a fee for each use. Fewer lenders offer this, but it might help companies trying to match payments with revenue. While businesses can bundle the entire solution for consumption models, the expenses (such as servicing, equipment, upgrades and implementation) can be unpredictable. Using the equipment more than planned could exceed standard monthly payments.
Loans
With rising inflation, it might be best to lock in long-term, fixed rates for loans. That could help small- to mid-sized companies facing tightened expectations from end-clients. With loans, companies own the equipment and build equity as payments are made. Companies might also benefit from Section 179, which would allow them to deduct the cost of equipment as an expense for the tax year it’s placed in service. The tradeoff: loans have higher payments than leases.
In this volatile market, cash is king. Some companies with enough capital might use it for a down payment on a loan, but others may reserve that capital, saving it so rising interest rates help it grow. To preserve liquidity, companies might seek lenders that offer financing at 100% of the equipment – including installation and delivery – without down payment.
Tailoring Solutions
Companies have long leveraged equipment financing to grow through volatile economic cycles. When weighing the best options, it’s important to work with a lender that understands your business and your equipment to structure flexible financing solutions tailored for your company.
