State-of-the-art machinery and equipment form the core of a productive and efficient business. However, buying and maintaining machinery is another story altogether! Not to mention, continually upgrading it. Such purchases require huge upfront capital investment and continuous working capital for upkeep and maintenance. This is where business equipment financing or leasing comes to the rescue.
Equipment financing and leasing
Equipment loans are when you take a loan to purchase the equipment. Through such financing, you own the business equipment and are responsible for its maintenance. On the other hand, leasing means paying a periodic rental to lease the machine or equipment for a predetermined tenure. At the end of this time frame, entrepreneurs can return the machine or buy it at the asset's market value. Both approaches help businesses increase liquidity and manage cash-flow better.
Here are a few tips to consider before going in for equipment financing and leasing:
1. Extent of upfront capital:
You must assess how much money you have to invest upfront before considering equipment financing. An equipment financing loan would not require full upfront capital but would still require a down payment.
An entrepreneur may consider leasing if they do not want to pay
any cost for the equipment upfront, as it does not require down payment or
collaterals. With leasing, you can convert the entire value of the asset to
monthly lease payments.
2. Rate of Technology Upgrade:
Equipment financing is useful in cases where one does not expect many upgrades in the technology backing the machinery concerned or is confident of the investment's ROI. Also, in cases where you would be using the equipment for a very long time, a loan might work out cheaper. However, if the technology is upgrading fast within your industry, a lease might be viable as you can continue upgrading the equipment you lease without many financial implications.
Instead of investing upfront CAPEX, equipment financing and leasing have added tax benefits. The monthly outflows of lease rentals and loan instalments become operational expenditure, ultimately reducing the taxable income for your business.
4. Service Provider: You must take
equipment financing and leasing from relatively established financial service providers as they are long-term loans. For your business's stability, it becomes vital to finance/hire such crucial equipment for your businesses from financial institutions that are stable in the long run.
Such financing, both loans and leasing, require substantial
product understanding, industry credence, and reliability to serve clients
well. So, choose a reputed name within the financial services industry to
access such kind of loans. At Tata Capital, we make sure to offer strategic
advisory and financing support to our equipment finance and leasing
customers.
5. Imported Equipment:
If you are importing equipment from other countries, you may need the combination of Loan /Lease facility, Letters of Credit (LCs), and Buyer's credit. Choose an integrated financing partner who has the expertise to guide and support you with the right solution.
6. Terms and conditions:
There is a financial lease where you have a buyout clause, and an operating lease, where you get no ownership but can use equipment as per your need and lease tenure. Understand both options well before making the strategic call for your business. Equipment and machinery are the lifelines of every manufacturing entity. It's essential to read, ask, and understand all the covenants and clauses regarding asset ownership at the end of the lease tenure. At Tata Capital, we make sure to provide transparency to all our clients right from the beginning to rest assured on the investments they're making to secure their future.
7. Partnership:
Any equipment needs maintenance and insurance to upkeep machines across its life cycle. Small businesses that tie-up with financiers with excellent tie-ups with the OEMs and the Insurance companies benefit from integrated solutions that safeguard their equipment and investment.
Equipment dealers may offer in-house financing. However, for a
business owner looking at an improved return in investments, it may be worth
considering the role of experienced financial companies better placed to offer
priceless expertise and better deals.
It is vital to understand your business's unique requirements before deciding about equipment loan financing or choosing to go in for leasing. Take the time needed to structure an equipment loan that best suits your long-term needs, be it business equipment financing or leasing.
12 November 2020
4 mins read
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