Equipment financing is one of several financing options that are available to businesses looking for start up/growth capital. It includes things such as machinery, computers and computer software. Equipment financing does not tie up cash, credit cards, or receivables. In fact, it can reduce the overall amount of cash that a business will need. The best thing about it is that it can be written off for tax purposes.
Finance Option #1
One finance option available is a general equipment loan. This can be quite sensible because a large majority of equipment that is bought this way is not likely to become obsolete quickly. Only information technology and medical related industries need to worry about the frequency of equipment becoming outdated. In general, for most other industries, an equipment loan is a wise option. Things like ownership and equity are other reasons that make equipment loans a good choice.
Obviously you get the same benefits you would if you owned the piece of equipment – and you can use the equipment while you are paying off the loan. In addition, it allows you to use the equity to find more working capital later if necessary. The main benefit of an equipment loan is tax related. A business can show new equipment worth up to $25,000 as expense for the first year that it is purchased. This decreases the final purchase cost of the equipment. Also, any equipment bought with a loan of an amount over $25,000 is eligible for depreciation over the next several years, giving you an ongoing tax deduction.
Finance Option #2
Another option is equipment leasing. It allows a business to get the most tax benefits and, at the same time, saves cash when compared with other available forms of equipment finance. Leased equipment must be returned eventually. However, very often the lessor gives businesses the option of buying it outright for fair market value when the lease period ends. The monthly payments are tax deductible. However, you should speak with your accountant before leasing equipment. The advantage of a lease over a loan is that you simply pay rent, and not interest.
Raising Quick Capital
A new concept now available for businesses to raise quick capital is called an equipment sale and leaseback. With this option businesses can get up to 70% of the original buying price of any equipment they own. They simply sell the equipment to a specific type of buyer. After the sale, the equipment remains on the seller’s property, and they lease it back from the purchaser, paying the usual rental rates. Money procured through this kind of sale can be used directly for startup and business expansion with no restrictions. Businesses prefer this option due to the lack of restrictions on how the money is used. Unlike loans, no collateral is needed for this transaction. An equipment sale and leaseback does not affect the other lines of credit, and monthly payments are all 100% tax deductible.
If you’re looking for affordable and flexible business start up financing, equipment financing may be just what the doctor ordered!