Small Business Equipment Financing

Small business equipment financing might be a relatively low cost financing option for your companies. This type of financing can be obtained from leasing companies, banks, suppliers, vendors or some manufacturers.

Equipment financing is usually secured by the equipment being leased instead of personal assets, so if you default on your payments, you risk losing the equipment. However, conventional lenders usually don not provide equipment financing for businesses in start up stage, they are more focused on the operating history from prospective lessees.

The advantages of small business equipment financing include:

• Free up cash. Many leases require little or no down payment and they allow you to free up funds for other business expenses.
• Less debt on financial statements. Since you do not own the equipment, neither the leased equipment nor the leasing cost appears on a balance sheet.
• Convenience. Lease financing is often more convenient than alternate means of financing. Many leasing companies also provide lease upgrade or termination (with a fee) options. You can also have an option to buy the equipment at the end of lease term.
• Tax deduction. Leasing costs are deductible expenses that immediately reduce your business's taxable income.

However, there are also some disadvantages for equipment lease financing;

• Overall costs. Lease financing is usually more expensive than revolving bank debt since lease payments have built-in interest of 12-14%.
• No equity build-up. Your lease payments usually do not establish any equity in your leased equipment. A purchase option might be an effective way to create equity in your leased equipment.
• Lost tax benefits. Although you can take tax deduction on the lease costs, you also lose tax benefits on the equipment depreciation.
• Commitment. Once you sign a lease, you have to make payments until the lease ends. Most equipment leases are either non-cancelable or impose a stiff early termination fee.