How to determine the best approach for financing your equipment

When it’s time to expand, upgrade or just keep business running smoothly, having the right equipment financing strategy can affect your overall financial position. Financing is available for all sizes of equipment acquisitions, from smaller technology upgrades to large-ticket items, such as heavy earth-moving equipment or aircraft. If the equipment has a model number and serial number, chances are it can be financed or leased.

When approaching an equipment financing source, it’s important for businesses to be prepared.

“A business plan is an important tool when looking to finance equipment,” says Danny Scullion, senior business relationship manager with Wells Fargo. “The business plan will explain why the equipment is needed and important to your business. It will show how the equipment will be used and how it will provide value and revenue to the company.”

Smart Business spoke to Scullion about how businesses can finance the equipment that keeps them up and running.

What are the first things to consider when financing equipment?

Look at your company’s capital position to determine what the right financing option is. Future cash flow should also be a consideration, as financing may affect the cash flow of the company both in terms of the productivity the equipment may provide and the required payments. It is also a good idea to consult with your company’s accountant to help determine the best option available for the business.

Before acquiring equipment, evaluate the value that the equipment is likely to bring your business. Business leaders then need to decide what financing product makes the most sense for the company, whether it is to lease the equipment, obtain a loan or use cash to purchase. Each option has its benefits.

A lease, for example, typically has little to no out-of-pocket expense up front, whereas a loan may require a down payment or equity injection into the equipment. Business leaders should also consider what impact a lease or loan will have on the company’s balance sheet. Some leases are off-balance-sheet financing, so the lease payment shows as an expense on the income statement rather than a liability on the balance sheet. If leased, the asset is not carried on the balance sheet either. This can be helpful for a company that has to comply with leverage or debt covenants because these ratios remain unaffected with a lease. Leases can also provide a company with more flexibility regarding the equipment. Some lease structures can include options to return the equipment at the end of the lease, upgrade the equipment, purchase the equipment, or renegotiate the lease. This can allow a company to keep up to date with changes in technology and may provide a competitive advantage in the market.

Companies should also consider the long-term impact of the equipment. A loan may be the best option for equipment that will likely remain useful beyond the initial financing term.