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10 Considerations When Financing Heavy Equipment

After several years of uncertainty, the economy is now showing signs of improvement. As a result, many manufacturing companies are getting back to making larger investments to help expand and enhance their business. Financing a new piece of equipment is an important decision; you should take all considerations into account beforehand to ensure that you are preserving your cash and making the most economical decision for your business.

When financing heavy equipment, you have two options: lease or loan. Each option has its advantages and disadvantages, so it's important to evaluate both options to determine which would balance out your cash flow, usage, and financial goals. Here are 10 considerations to keep in mind when financing heavy equipment.

1. Long-Term or Short-Term Needs

The first consideration to make is how long you expect to need the piece of equipment. Is this something you'll need for less than 36 months? If so, your best option, in this case, would be leasing the machine. If you expect to need the equipment for longer than 36 months, applying for a loan is most likely in your best interest.

2. Your Budget

Financing heavy equipment is an ongoing expense, so determining your monthly budget ahead of time is critical. Figuring out how to fit a new piece of equipment into your budget will help you avoid future financial pitfalls and plan ahead for additional expenses. In many cases, a lease will come with lower monthly payments, which may make it easier to fit a new piece of equipment into the budget than a larger loan payment.

3. Obsolescence

As with any piece of technology or machinery, the potential for obsolescence is a major factor in deciding if you want to invest in the equipment. If the equipment becomes outdated during the financing period, that risk falls on the lessor. However, you may be able to find a financing program that includes technology upgrades in the lease contract.

4. Equipment Versatility

As a business owner, your primary goal is to produce revenue. The best way to do that is to get the most bang for your buck when investing in your supplies and equipment. If the machinery you're considering has limited usage, is only required short-term, or won't be used for multiple projects, the best course of action is to finance it with a lease. This way, the expense will end at the same time your need for the equipment ends. This is more cost-effective than continuing to pay on a loan for a piece of equipment you no longer need or use.

5. Upfront Cost

Knowing how much cash will be required upfront when you finance heavy equipment will help preserve your cash. You should also factor in expenses, including transportation, delivery, installation, testing, training, and other potential costs. Some loans require a down payment on signing day, so you'll want to make sure you have the cash available on the day you purchase the equipment.

6. Tax Benefits

Taxes are a frequently overlooked element of financing heavy equipment. When deciding between a loan and a lease, you'll want to consider how the taxes will be handled. A loan will offer a depreciation tax benefit for you, while a lease provides tax benefits to the lessor. They receive lower rent payments and can expense the payment. If your business cannot take advantage of the tax benefit, a lease may be a better option than a loan. This way, you can trade in a depreciated piece of equipment to improve cash flow.

7. Impact On Your Business

Most businesses receive an aggregate line of credit from their bank to purchase inventory, business enhancements, and additional capital expenses. Depending on the lender, you may be able to conserve working capital but leasing your heavy equipment with an equipment finance provider.

8. Flexible Financing

Leases often offer more flexibility than loans since you can adjust the structure of the agreement. With a loan, you are at the mercy of the lender's stipulations. If flexibility is your top priority, then a lease may be the best option. If you still need the equipment after your lease ends, you have the option to extend your rental, purchase the recruitment, return, or trade it in for another machine. If your need for the machine ends when the lease does, you can turn it in, and the expense ceases.

9. Need For Additional Equipment

Suppose you are expanding your business and anticipating growth. In that case, you have the option to sign a master lease that will allow you to obtain several pieces of equipment with the same general terms and conditions. This helps you maintain some flexibility, offers more convenience, and can be renegotiated when you need to add more equipment in the future.

10. Eligibility Requirements

To get a loan at a competitive rate, you'll want to consider your eligibility requirements. These may vary from lender to lender, but they'll usually consider the following factors:

  • Industry

  • How long you've been in business

  • Annual revenue

  • Credit score

Considering these factors before jumping into a loan will help you guarantee that you get the best deal and rate possible when financing heavy equipment.

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