Options for equipment financing for small business

When your small business moves on to the path of growth in requires getting in new equipment to match up with the increasing demands. With the emerging need the small business owner is required to sit down and start making calculations about the funds required.

Small businesses are always found going through a cash crunch, so where can they find the money to buy the new equipment. The most practical and preferred method of arranging for funds for purchase of equipment is through equipment financing. Lets understand why equipment financing is such a critical issue, for instance if a small business makes a 18 percent as the net profit on its capital investment and has to pay something like 8 or 9 percent in order to get the equipment financed or to take equipment on lease then it would be highly impractical if he spends his major chunk of capital on the purchase of expensive equipment.

The important decision for the small business owner to make here is on what basis should he get the equipment, he has three choices:

? Outright purchase using loans.

? Taking equipment on rent or

? Getting equipment on lease.

Leasing seems to be a trend of the past as with the low and attractive rate of interests on loans they seem to be the most plausible alternative. We will shed some light over this matter to see how true this statement is.

Leaving aside the macro economic conditions, you need to make calculations around the micro economics where factors like cash flow, the tax situation, utilization and your business targets before you embark on the path of choosing the most apposite equipment finance package.

A loan which involves a series of fixed payments for a fixed term may turn out as the most inexpensive method provided there are no the business situation and the tax status are running smooth. You are able to keep your capital free when you use a loan to finance equipments. As far as the depreciation on the equipment is concerned it will remain the same as it would be incase of outright purchase using the business capital. The interest that is aid on the loan is deductible from your pre tax income, and inflation playing hard the real cost of your payments shrinks with the passage of time. With this said the interest may not be as expensive as it appeared towards the beginning. However, the bonding capacity of the business is reduced to some extent as the balance payments on the loan are looked upon as liabilities.

Moving on to leasing of equipment, the first thing to remember is that some of the leases are held up as operating expenses by the IRS and thus can get you significantly large tax deductions. Increasing cash flow is a bigger prerogative for all businesses especially small businesses, and this can easily be achieved using the equipment lease option, where the monthly payments are much below the payments for a loan.

The other benefit of equipment taken on lease is that your bonding capacity remains intact as the lease payments are not considered to be liabilities.

Some equipment lease types:

? Operating lease: it may be understood as a long term rental. At the time of the expiry of the lease the equipment can either be returned back to the contractor or if the business is willing it can buy the piece at a fair market price. This price would be similar to what you would pay to buy an equally used equipment in the open market. This type of lease is normally for acquiring specific types of equipments which would have no or low worth for the contractor at end of the lease, so you will be able to get this at a throw away price.

? Finance lease: this is also referred to as capital lease. The most interesting feature of this is the bargain purchase option which facilitates the small business to buy the equipment at the end of the lease period for a price which is much below the fair market value. Each payment that you make under this arrangement will make up fro both he interest and the principal. At the end of the lease the equipment can be purchased by paying off the balance of the owed amount in the form of a final balloon payment. At times it may also be possible for a finance company to convert equity into a down payment and the remaining balance can be paid of using a low interest rate loan. When the initial lease agreement is made there is a clause inserted which contains the information about how much the business will have to pay in case of term end purchase. It may also contain the option of early buy out, which allows the business to buy the equipment before the lease expires, normally the period set for it is six to twelve months preceding the expiry date.

? Master lease: this is a form of agreement which talks about a number of pieces of equipments along with information on additional future acquisitions which the business proposes to the contractor. For every addition of equipment to be made to the lease, the small business owner will only be required to attach a schedule to the master lease agreement. A master lease also offers the business owner the facility to obtain equipments from different dealers under single umbrella contract, also used equipment can be included in the master lease. The biggest advantage it offers is that you dont have to go through the same long procedure for every piece of equipment you need.

Last of all we will discuss about rental, which is the most expensive method of equipment financing, and that is the reason we decided to keep it short. Though expensive, it offers several advantages like:

? When the rental is compared against the total cost of financing it may not seem all that expensive.

? There are no added costs related to equipment taken on rent like there are no taxes, fees, maintenance charges and ownership related costs.

? Ideal for those equipments which are required only for short durations so your money doesnt get blocked.

? None of your equipments will be wastage of money, because if you dont need it you can always send it back.

There is much more that needs to be understood about equipment financing for your small business, for which you need to read the section two of this article.