Businesses of all sizes finance equipment. Many start-ups and small, growing businesses finance business equipment because they lack sufficient capital to make an outright purchase of the equipment they need – from office copier to display cabinets for the new store.
Is financing equipment a good strategy to grow your business?
Here are the considerations you, and your financial advisors, should weigh before taking this important step.
1. Determine how the equipment will be used. Consider the equipment from different perspectives. How long will you need the equipment? Will it increase productivity, and subsequently, the company’s bottom line? At what point will the company break even?
Develop a cost-benefit analysis. Size up the projected costs of financing the equipment against anticipated revenue growth. Does the equipment grow your bottom line? Is it essential to business operations? If so, how and why?
Talk to your management team to determine the importance of the equipment. An office computer server is often a “must-have,” but you may not need another company car right now. Let your team in on your plans, and get good input from those in the know.
2. Determine total cost of ownership (TCO). Total cost of ownership includes “cradle-to-grave” costs of, and deductions for, equipment ownership including:
- the initial purchase price
- the cost of updates and upgrades
- maintenance costs
- monthly cost of service contract
- emergency repair costs
- tax deductions for equipment depreciation
There are a lot of numbers to crunch to help you calculate the actual cost of buying an expensive piece of business equipment.
It’s also important that you understand all costs associated with equipment financing, including interest and loan fees. In this case, multiply your monthly payment, including any taxes and fees, by the number of months the equipment financing agreement is in place.
3. Finance business equipment through a knowledgeable source. Your bank is an excellent place to start. Working with your bank’s business professionals, you can more accurately determine whether to finance equipment, or wait until you can purchase it with the proceeds from business revenue.
If you and your bankers determine that equipment financing is right for your company, you’ve simplified the process of getting financing from your bank, because the institution now knows you, your business and your credit-worthiness, and has seen the arguments in favor of financing the equipment to help grow your business. The business professionals at your bank may also recommend the right financing package for your business.
4. Read the fine print, and the really fine print. Take your time reading any equipment financing agreement. Be sure to carefully read all the terms, including late fees, return fees, restocking fees, interest rates (fixed or variable), a financing application fee – go through the entire finance agreement with your bank representative to help you understand all potential fees that might be assessed against your company under certain contractual conditions.
Your financing agreement may also include ancillary expenses. For example, your company may have to provide and pay for insurance on the financed equipment. Insurance premiums on a financed company car are typically paid by the business that uses the vehicle – and carrying adequate insurance is usually part of the financing agreement.
5. Ask questions. In addition to meeting with your banker to go over all the details of your agreement, discuss your upcoming decision to buy or finance equipment with your accountant. There may tax ramifications that should be weighed.
For example, when you purchase equipment, your accountant may depreciate the value of that equipment over a period of years according to the regulations of various taxing agencies at the local, state, and federal levels. The interest you pay on the equipment loan may also be tax deductible under certain conditions.
Take the time to weigh the pros and cons of purchasing equipment from business operation revenues, versus financing business equipment to meet your current circumstances, and plan for a brighter, more productive business future.
For information on financing equipment* through Nevada State Bank, please visit nsbank.com or stop by any branch.
*All loans subject to credit approval. Restrictions apply.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.