How to Choose the Right Equipment Financing Option
Buying new equipment is a major investment and upfront cost, and that’s why equipment financing has become a popular option for businesses. According to the Equipment Leasing and Finance Association (ELFA), nearly 8 in 10 U.S. companies (79%) use some form of financing when acquiring equipment, including loans, leases and lines of credit (excluding credit cards).
Before beginning your search for securing financing, it’s important to consider your specific circumstances, such as the cost of your equipment, the length of time you will need the equipment, and your credit score. The best option for your business will depend on your needs and circumstances.
Here are the most common types of equipment financing:
- Equipment Finance Agreements: Equipment finance agreements are a type of loan that is used to finance the purchase of equipment. The equipment is owned by the lender, and the borrower makes monthly payments to the lender until the loan is repaid. Equipment finance agreements can be a good option for businesses that need to purchase equipment but do not have the cash on hand to do so.
- $1-Out Leases: $1-out leases are a type of lease that gives the lessee the option to purchase the equipment at the end of the lease term for a nominal price, such as $1. $1-out leases can be a good option for businesses that are not sure if they will need the equipment for the long term.
- Fair Market Value Leases: Fair market value leases are a type of lease that is based on the fair market value of the equipment. The lessee makes monthly payments to the lessor that are equal to the depreciation of the equipment plus interest. Fair market value leases can be a good option for businesses that do not want to own the equipment at the end of the lease term.
- SBA Loans: SBA loans are loans that are guaranteed by the Small Business Administration. This means that the SBA will cover a portion of the loan if the borrower defaults. SBA loans can be a good option for businesses that have difficulty obtaining traditional loans from banks.
- Sale Lease-Back: A sale lease-back is a transaction in which a business sells its equipment to a leasing company and then leases the equipment back from the leasing company. Sale lease-backs can be a good option for businesses that need cash but do not want to give up ownership of their equipment.
- Working Capital Loans: Different than equipment financing, working capital loans are loans that are used to finance a business’s working capital needs. Working capital is the money that a business needs to operate on a day-to-day basis. Working capital loans can be used to cover expenses such as inventory, accounts payable, and payroll.
Choosing the right equipment financing option can be a challenge, and it is important to do your research and find the option that is best for your business. Working with a trust financing partner can make the processes easier and ensure you are satisfied with your financing decision. Contact US Capital today to learn more.