By Vernon Tirey
Equipment is the basis of business – imagine a coffee shop without an espresso machine, a warehouse without a forklift, or a tire shop without a hydraulic lift. Equipment is also a requirement to grow your business as it helps accommodate increased demand for your products and services. These facts are no-brainers for small business owners and entrepreneurs; to pay cash or not to pay cash – that is the question.
Managing cash flow is a challenge for businesses of all sizes, but particularly for smaller companies needing to add equipment at the get-go or to take your business to that next stage. While purchasing equipment outright comes with the benefit of total ownership, no interest payments or bank fees, the lack of cash can have severe disadvantages when businesses are forced to lay off employees or pass on a big opportunity. Financing equipment in the form of a lease or a loan can put the equipment to work for a business owner without a major capital investment up front.
Generally, a loan is a contract to borrow money and can be either secured or unsecured. A lease, on the other hand, could be considered a type of rental contract for equipment, and is almost always secured by the equipment being purchased. While both loans and leases have the benefit of tax-deductible, low monthly payments, there are distinct differences to consider. Loans have a higher monthly payment, though the benefit of owning the equipment after the final payment is made. Leases, on the other hand, allow for use of equipment over a set period of time, but tend to have a lower monthly payment, less paperwork and a quicker funding process with little to no down payment.
Both methods of financing equipment have real cash-flow advantages for the small business owners. A low monthly payment is certainly one advantage, but there are several others, including, but not limited to:
1. Saving “Hidden Costs”
Financing equipment preserves cash not only in spreading out the cost of the equipment itself, but also in covering the “hidden costs” of delivery, installation and maintenance. Leasing in particularly includes everything it takes to get your equipment up and running, from signature to the first soy latte and beyond.
2. Preserving Cash for Growth Initiatives
Cash is fuel for your growth engine. Financing equipment allows for a much stronger cash flow, with cash on hand for investment into other growth initiatives such as product development or sales and marketing. It also allows companies to make strategic hires or avoid embarrassing layoffs. Remember nothing fuels success like success.
3. Realizing Tax Advantages
Equipment purchases with cash are made with after-tax dollars, while monthly lease or loan payments are considered a pre-tax business expense. This means financing equipment can help preserve cash by reducing taxes and increasing profit margin.
4. Simplifying Accounting
Monthly lease payments, in particular, show up as a single line-item on your balance sheet. Since time is money, this time saved on bookkeeping can be a real cash advantage for your business.
5. Economic climate
The best news? It’s also a great time to finance equipment. According to the Equipment Leasing and Finance Foundation (ELFF), equipment investment from lenders is projected to grow 5% in 2015, with greater investment slated for the second half of the year.
Additionally equipment financing has the equivalent of a “special” from time to time, particularly in and around the fourth quarter when finance companies are trying to hit their numbers for the year. Business owners and entrepreneurs should keep an eye out for 0% financing, no down payment for 30, 60, 90 days, or wait until the fourth quarter when finance companies are trying to hit their numbers for the year. As the saying goes, a penny gained is a penny earned.
Equipment is vital for small business owners and entrepreneurs. Ovens, tractors, trucks, x-ray machines, laptops, smartphones, and more are the tools that generate revenue, fuel hiring, and spur economic growth at the individual business level and for our nation as a whole. Equipment financing in the form of loans and leases exists to ensure that adding the equipment vital to growth allows business owners to preserve cash for a rainy day, or strategic investment, or just to reduce the stress of having to pay bills and make payroll every month.
Vernon Tirey is the founder and CEO of LeaseQ, where he helps startups and small businesses get equipment financing. He is a 30-year veteran in Marketing Services and Management Consulting, specializing in rapid growth and enterprise automation solutions. Follow at @VernonTirey, @LeaseQ