Owning and running a business is not as simple and fascinating as it sounds. Managers and Owners have to take the risk altogether in multiple decision-making scenarios. They need to take up a lot of challenges to tackle matters related to productions, human resources, marketing, finances, etc. Every aspect mentioned above holds a whole world of depth in itself. However, some things are more important and crucial than others as always, and in any business context, finance is the most crucial one. One of the main reasons is that it directly affects the financial planning of businesses. Also, unlike other departmental work, financial decisions have instant outcomes to management and serve as the bottom-line of the business altogether.
Among many vital decisions to take, one major aspect that every business whether it is in startup mode or expansion zone needs to take care of is the Capital Expenditure. Capital Expenditures are the spending which is usually done for the longer term and they are related to maintain or exceed the capacity of the company. Some of the few examples would be land, automobiles, computers, machinery, specialized equipment, etc. Capital Expenditure or “CapEx” in common financial lingo, usually involves large sums of money and in general amounts more than just monthly or annual expenses.
Therefore, the decision to acquire any major equipment or do Capital Expenditure is of higher importance for any finance manager or a business owner. So many traits and factors need to be considered while making this decision, but one of the daunting decisions to take is “how to finance this purchase of equipment?”. Usually, companies don’t want to spend a massive amount of money directly upfront in such purchases whether they have it or not, as many decisions need to be taken care of. That’s why companies look for some financial arrangements to get the purchase without breaking their bank upfront. There are many financing options available and offered by the equipment vendors themselves or the banks as an intermediary. Among the humongous range of financing options, leasing and loan financing are the popular ones.
A simple layman does understand that both of the options are loans in some nature and there will be interest, principal amount, installments, etc. One can simply look for an equipment loan calculator online and get the final amount to be paid. But it is vital to understand the key differences to get a better basis for decision making. Let’s take a deeper dive to understand both of the options and to explore factors crucial for any business to consider while making this financial decision.
THE KEY DIFFERENCES:
In both options, you will get access to the equipment and you can use it for your business. But the difference lies in the layout and structure of ownership of the equipment.
In Equipment Leasing, it is a sort of rental arrangement. Your Lessor (the owner of the asset) buys the equipment and rent it to you for a monthly payment plan for a set number of years. There is no transfer of ownership of the equipment at the end of the lease period. You can renew the lease, return the equipment or simply buy the equipment.
Usually, in leasing, you can get two types of arrangements in terms of buying the equipment in the end.
In Equipment Financing, it is simply a mere loan agreement with some ownership of asset factors. In this mode of arrangement, you will be loaned by a financer with the cost of the equipment you require. Depending on the type and cost of your equipment, whether you get the full amount of most of it, you will be asked to pay the principal amount with interest amount over the period. And once you settle the whole amount along with interests in the given period, you fully own the equipment.
Apart from the key differences in ownership and payment elements, let’s understand both options in a bit detail to form the rationale for better decision making.
PRO AND CONS:
Some of the pros are:
Talking about the cons, we have:
Some outstanding pros are:
Some considerable cons include:
Both options are feasible in different circumstances. But the key question is about determining the actual need. How crucial the equipment is for your business and the life of the equipment as well.
If the equipment will outdate early, go for the operating lease option. And if you are low on cash, loan financing would be a better fit for the bill. No matter what you choose, make sure to leave no loose ends in your research and awareness regarding the matter.