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SHOULD YOU BUY OR LEASE EQUIPMENT FOR YOUR BUSINESS?

To buy or to lease – that is the question. Many small business owners find this a hard one to answer. Read on as we explore how equipment leasing stacks up purchasing the equipment outright.

PROS OF LEASING EQUIPMENT

Conserve working capital: Purchasing equipment can require a significant chunk of working capital. This is one of the main reasons why the option to lease equipment exists. It allows businesses to obtain equipment with little upfront cost or investment.
Keep equipment up-to-date: If having the latest, state-of-the-art equipment is essential for your business, equipment leasing can be a good option. Depending on your arrangement, you may be able to lease as long as you want and upgrade equipment as needed.
Tax benefits: Your balance sheet shows lease payments as expenses rather than long-term debt. As always, speak to your accountant about tax implications before making significant financial decisions.

CONS OF LEASING EQUIPMENT

Higher cost: When you do the math and break down the numbers, equipment leasing is, unfortunately, one of the more costly financing options for small businesses. Because leasing companies typically don’t use the equipment for the duration of their lifespan, they have to bump up the fees to recoup the cost.
Nothing to show for it: At the end of the day leasing equipment equates to no ownership. That means despite your investment, there is no ability to resell equipment and recover costs.
Lack of flexibility: If flexibility is important to you and your business, keep in mind that you will be on the hook to pay for the full term of your lease whether you actually need the equipment for the entirety of that period or not. If you are able to get out of the lease early there will likely be large termination fees.

HOW EQUIPMENT LOANS CAN HELP

If you want the benefits of owning equipment but don’t have the capital to make a purchase, then an equipment loan may be a good option for you. Some of the key benefits include

Preserves working capital: With an equipment loan, you are able to spread the cost of the purchase over an extended period (i.e. up to 2 years) and retain ownership.
Flexible terms: While not all equipment loans are flexible, some loans specifically designed for Canadian small businesses offer highly flexible and customization terms, with no early repayment penalty.
Fast and simple: If you need equipment fast to replace or repair broken equipment or to take advantage of an opportunity,

8 QUESTIONS TO ASK YOURSELF BEFORE GETTING A BUSINESS LOAN

 

Are you considering a small business loan? If so, there are some questions you should ask yourself to make sure you’re making the right move for your business.

 

WHAT IS THE PURPOSE OF THE LOAN?

It is important to ask yourself why you need the extra money. This question will help you determine the type of loan and terms that will best aid you in reaching your business goals. Matching your loan to your goals will result in manageable payments, a reasonable loan term, and a better overall experience.

How much capital do I need?

Once you have determined the reason you need a loan, it should be fairly easy to identify how much capital you need. It may seem smart to get your hands on as much capital as possible, but too much debt could negatively impact your business. Borrow only what you need; more capital isn’t the solution for everything (even though it may seem like it) and can end up costing you in the long run.

 

DOES MY BUSINESS HAVE POSITIVE CASH FLOW?

Lenders like positive cash flow because it shows you can repay your loan. If your business is losing money you will be determined a higher risk and it can be very difficult to get approved. Take a look at your bank statements and figure out if there’s more coming in than going out. This will help determine the payment you could afford.

 

HOW MUCH DEBT DO I CURRENTLY HAVE?

A reputable lender will always consider the existing debt a business has. Not only will they want to know how much you owe and to who, but they’ll want to make sure you’ll be able to repay both your existing loan(s) and the new loan. Your DSRC (Debt Service Ratio Coverage) is a good indicator of your ability to repay.

 

WHAT DOES MY CREDIT PROFILE LOOK LIKE?

Understanding your credit score is a major step when considering a small business loan because virtually every lender factors it into their decision. Both your personal and business credit profiles will likely be reviewed which is why it is vital to build and improve your small business credit score.

 

WHAT IS MY PAYMENT HISTORY?

If you’ve had loans in the past, showing that you paid them off on time is an asset when applying for a loan. Past behaviors are a good indicator of future behaviors and having unpaid, late, or defaulted loans will make you less to get approved. If you have multiple loans to pay off or are carrying business debt on your personal credit cards a debt consolidation loan may be the answer.

There are small business loans designed for all types of businesses and situations. If you answer these questions and educate yourself on your options then you’ll set yourself up for success.