When you need equipment to start a new business, expand operations, or update existing systems, figuring out how to finance your business needs can be a headache. This is especially true if you have unique business requirements or are a small business without the resources for traditional financing.
Independent lenders like Team Financial Group typically offer any combination of loans, leases, and financing agreements. But sometimes, the average business owner can get lost trying to understand their options.
In this article, we’ll discuss the differences between loans, leases, and finance agreements and explain how to decide which one is right for your business.
The difference between loans and leases is relatively straightforward, but equipment finance agreements blur the lines between loans and leases. In this section, we’ll describe some of the main features of loans, leases, and finance agreements and highlight one of the main differences, which is ownership.
Also, note that leases come in two main types: operating leases and capital leases. In this blog, when we say “lease,” we mean an operating lease. Capital leases (such as a $1 buyout lease) and equipment finance agreements are essentially the same.
Loans are used to borrow money for the purchase of equipment, to acquire real estate, or to finance receivables and inventory. With a loan, you typically only borrow a portion of the money you need to purchase the equipment and make up the difference with your own finances in the form of a down payment. The debt will appear on your balance sheet, and you may expense the interest and depreciation on a monthly basis.
Loan agreements are between a lender and you, the borrower. A loan contract details how much you borrowed and at what interest rate you will pay it back over a set amount of time. With a traditional loan, the principal and interest vary from month to month depending on how quickly you are paying the loan back and whether you pay before, on, or after the day your payment is due.
Ownership: Your business owns the equipment purchased with the borrowed money.
Operating leases are rental agreements for the use of equipment. With a lease, you do not own the equipment. Payments are generally fixed, and many financing partners will offer 100% financing through an operating lease, meaning you don’t need any down payment.
Leases are popular options for equipment that quickly becomes obsolete, such as equipment or technology that needs frequent upgrades. Examples of equipment that many businesses lease include:
Ownership: The lessor owns the equipment throughout the life of the lease. At the end of the lease you typically have the option to buy the equipment for the current fair market value (FMV), return the equipment to the lessor or continue to lease the equipment.
Equipment finance agreements (EFAs) are similar to loans, but they aren’t traditional loans like we described above. With a finance agreement, your amortization schedule stays the same regardless of when you pay each month and how much you pay. Your equipment finance agreement won’t have stated interest rates, and the balance won’t break down into principal and interest. Instead, your finance charges will get calculated into the series of fixed payments you make over the term of the finance agreement.
So, the way you pay back a finance agreement is very similar to the way you pay back a lease. Much like with a lease, 100% financing of your entire equipment purchase is available with no down payment. However, with a finance agreement, you own the equipment outright like you would with a loan, and the debt appears on your balance sheet.
Overall, you can think of a finance agreement as a financing option that combines the ownership aspect of a loan with the financing structure of a lease. These agreements are often used to purchase assets that retain their value and equipment you plan to use long-term.
Ownership: Your business owns the equipment and pays back the loan with fixed monthly payments.
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So how do you know which commercial financing option is the right fit for your business needs? At Team Financial Group, we look at a variety of factors to determine your best financing option. But if you’re interested in gaining a general idea of what to expect before you apply, you can ask yourself these three questions.
1. What Type of Equipment Am I Financing?
If you’re looking to purchase equipment that will require frequent upgrades or will become obsolete in a few years, an operating lease may be your best option. A lease allows you to manage the costs of continually updating equipment because you don’t own the equipment and don’t have to keep it at term end. Instead, at the end of your lease term, you can choose to enter into a new lease agreement so you can obtain the latest and greatest equipment models.
On the other hand, a financing agreement may be better if your business is expanding and needs additional heavy equipment that will retain its value throughout the years. You will own the equipment right away, with a fixed term and fixed payment protecting you against rising interest rates. Your company is then able to depreciate the equipment any way it sees fit.
2. Do I Have Any Unique Financial Considerations?
While the type of equipment you require and how long you plan on using it are essential considerations, sometimes your business has unique needs that also affect which option is right for you. As an example, companies in industries such as construction, landscaping, and masonry may have seasonal changes in their cash flows. At Team Financial Group, we can work with these seasonal changes and create a payment structure that best fits your company’s needs. A seasonal cash flow may indicate that a customized lease that provides flexible payment options would be the best fit, as was the case for one of our agricultural clients.
3. Do I Need the Financing to Cover All of the Equipment’s Cost or Only Part of It?
Equipment finance agreements work well when you want to own the equipment and need to cover 100% of the cost of equipment with financing. However, if you have capital available to make a significant down payment on the equipment, Team Financial can use that to bring your payments down to a level that fits your cash flow.
At Team Financial Group, we offer leases and finance agreements that we can customize to fit your unique business needs. We’re dedicated to helping our clients grow and thrive by providing efficient and flexible financing options and personalized service.
Ready to get started? Applying is easy! Just visit our application page, fill out your contact information, and one of our commercial financing experts will get in touch to help walk you through the application process and determine which option is right for you.
If you have questions or concerns you want to address before you begin the application process, we can help. Get in touch with us by calling 616-735-2393 or by filling out our convenient online contact form.
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