Equipment finance and leasing for small businesses

The right equipment is essential to keep your business running smoothly, but it can also be expensive. That’s where equipment finance comes in. 

Whether you want to put out a new product line, fit out some premises, or better manage seasonal demands, equipment financing can help access the tools you need to do it. With a vast number of options available, this guide will take you through the basics of equipment leasing and financing, cover some key differences and highlight the pros and cons.

What is equipment financing?

Equipment financing is a kind of small business finance that helps companies purchase equipment and machinery. In most cases the funds are secured against the equipment itself. 

In general, equipment financing falls into two categories:

• Capital Lease tend to be long-term agreements that are non-cancellable. They're usually used to lease equipment that a business needs for long-term use and it's often possible to purchase the equipment at the end of the lease period.
• Operating Lease are in most cases the opposite. They're short-term and can be cancelled before the end of the lease period. Businesses use operating leases when they intend to use equipment in the short-term or plan on replacing the equipment after the lease ends.

How does equipment financing work?

Equipment finance involves taking out a kind of business loan, which is used to acquire assets or equipment. The business then makes repayments over a period of time, during which it has possession and use of the assets. This style of finance allows businesses to manage cash flow by spreading out the costs of expensive equipment, which it may eventually own once the funds are repaid.

What sort of equipment can I finance?

In practice, you can finance any equipment that has sufficient value, individually or in gross, to act as collateral. Here are some things that small businesses commonly finance:

• Office furniture and appliances: Computers, printers, phones and coffeemakers
• IT equipment: Smartphones, tablets, displays, routers and software
• Vehicles: Cars, trucks, vans and motorbikes
• Heavy machinery: Cranes, diggers and forklifts

What’s the difference between equipment financing and a business loan? 

Generally, a business loan will deliver a lump sum of cash that can be used for anything that helps grow or operate your business. This could include purchasing a piece of equipment, but could also be used for other reasons such as payroll or expenses. In comparison, an equipment financing agreement will be drawn up with a specific piece of equipment in mind – that could be a company vehicle or piece of machinery. 

This means that a business loan is much more flexible than equipment financing – you could receive a larger sum of money that can be used in a variety of different ways. The downside is that you might need to secure this business loan against a piece of collateral.

With equipment financing, the equipment itself acts as the collateral for your loan, which could make it more readily available for businesses in need of finance. As long as you keep up your repayments, you’ll be able to continue using whatever piece of equipment has been lent to you.

Types of equipment financing 

Within the category of equipment financing, there are a few sub-categories. These include: 

Sale & lease back

This is when a business sells a piece of equipment to a lender and then leases it from them on a long-term basis. This type of equipment financing is common within the construction industry, where a firm may sell their construction vehicles and then lease them back from that same lender. The benefit is that the borrower is able to use the piece of equipment, without actually owning it. It’s more common for items of a high value. 

Green asset finance

This type of equipment financing is centred around sustainability, and can help you purchase the equipment you need to make your business greener or achieve sustainability goals. 

Equipment could include electric vehicles or machinery, in addition to items that are particularly energy efficient. Not all lenders offer this type of equipment financing, so be sure to shop around if this variation aligns with your business goals. 

How much does equipment financing cost? 

Every lender will have their own interest rates – these will also depend on the specific details of your business, such as your annual turnover and credit score, as well as the value of the item you want to finance. For example, a commercial farm vehicle will cost a lot more than a piece of kitchen equipment. 

You’ll also want to consider whether your chosen lender requires you to make an initial lump-sum down payment. This is a percentage of the total item value that you’ll need to pay upon entering the equipment financing agreement. All of these factors will determine the overall cost of your equipment financing. 

Case Study: How Bear Kitchen funded new fridges

Let’s look at a more detailed equipment finance example.

Bear Kitchen is a game restaurant that's become known for its wide range of wild meats. The restaurant is expanding its menu to include items from further afield, so it needs more on-site refrigerators. Because Bear Kitchen’s cashflow is often affected by seasonal trends, the owners choose to finance the refrigerators over two years. This helps Bear Kitchen grow its business and reputation, while managing the repayments over a preferred time-span.

The walk-in fridges cost £10,000 and the equipment finance provider agrees to a 24 month repayment schedule. The interest rate for the funds is 12.1% fixed, which results in 24 monthly repayments of £468.30 over the two year period. The total repayable amount will be £11,238.

How long can you finance equipment?

Typically, businesses can finance equipment for as little as a year and for longer periods up to seven years.

The length of financing will depend heavily on what kind of equipment is being funded, how much it will lose its value, and for how long a finance company is willing to agree in your contract.

For example: 

• A piece of farm machinery, such as a tractor or harvester, could be financed for up to seven years
• A commercial coffee machine may have a shorter loan term of between two and five years 
• A vehicle, such as a van, could have a term of between one and five years, depending on its age

Leasing vs buying equipment

By now, you’re probably thinking of an important question: should the business buy equipment or lease it instead? Again, this will depend heavily on the nature of your business and the equipment it needs. But there are important points to keep in mind.

If you operate in an industry where technology and equipment change rapidly, leasing may be a better way to keep up with the latest tools. More importantly, it helps your business reduce upfront costs, while allowing it to invest the cash it would have used to purchase equipment into other areas of the business, such as recruitment, marketing, training or product development.

Equipment you might need finance for

Of course, every business is different. There is an almost endless array of equipment your business might need. Here are some common types:

Construction equipment financing

Heavy equipment finance companies have long had a role in helping residential and commercial builders across the country. Given the specialist machinery needed to complete large developments and key infrastructure projects, it’s no wonder that many construction firms opt to use construction equipment financing for bulldozers, excavators, drills and cranes.

Woodworking machinery leases

Similarly, woodworking requires specialist equipment. Whether your business makes designer wood furniture or roofs, floors, or sheds – the right machinery is needed. Some typical kinds of leases may cover wood lathes, bench grinders, or sanding machines. The benefit of leasing this kind of equipment – as opposed to buying outright – is that businesses can better manage seasonal changes in demand, keep inventory up to date, and manage cashflow.

Forestry equipment loans

Of course, woodworkers cannot make cabinets, furniture, or other wood-based products without the raw materials to do so. Logging businesses play a critical role and they too need specialist equipment to do so. That can include feller bunchers, delimbers, or stump grinders.

Equipment leasing FAQs

What is equipment leasing?

Equipment leasing is a kind of rental agreement that allows your business to use equipment in exchange for payments. It can be a useful option, if you prefer to avoid making a large outright purchase, while still getting to use key equipment to keep your business competitive.

How do equipment leases work?

There are a range of different equipment options, but here are the three common kinds: contract hire, hire purchase and finance lease.

Contract hire

Contract hire can be a useful option for businesses that need access to specialist equipment for a limited time, such as a one-off project. For example, a painting company may only need a motorised crane to reach the windows on the higher floors of an apartment block and not for the rest of its typical ground floor projects. A key benefit for businesses is that this kind of hire may be recorded as a business expense.

Hire purchase

As the name suggests, hire purchase allows your business to use the equipment while making payments toward its eventual purchase. Under this arrangement, a business will eventually own the equipment it’s currently hiring.

Finance lease

With finance leases, the lender makes the equipment purchase for your business and then it make repayments to the lender, who retains ownership of the equipment while your business uses it. Again, this can be useful for businesses who want to avoid making a large purchase.

What are the benefits of leasing?

There are several benefits to leasing equipment instead of purchasing it outright:

• Your business gets access to the right equipment without large upfront costs
• Your business may be able to list the ongoing equipment costs as an expense
• Some finance company contracts may cover equipment maintenance and repairs
• Some contracts may accommodate repayment flexibility for seasonal businesses
• Your business can lease a wide variety of equipment to test its usefulness

What are the disadvantages to leasing?

And what about the drawbacks? There are a number that you should be aware of:

• Your business must be VAT-registered to lease equipment
• Leasing over long periods can be costlier than an outright purchase
• Unless you choose hire purchase, you won’t own the equipment
• Tax implications and regulations often change — ask your accountant
• Contracts may need to be carefully negotiated and they can automatically roll over

What is the difference between leasing and renting equipment?

In one sense, rental agreements are leases under a different name. Rental agreements are often for a shorter period of time, such as a year or less.

Is leased equipment an asset?

You don’t own the asset, so no. The upside of this is that it doesn’t appear on your books. The downside is that you don’t acquire an asset that can be used as collateral for seeking additional finance down the track.

Is leased equipment tax deductible?

It depends. Under capital allowance rules, you may be able to deduct some of the costs of long-term leases from your taxable profits each year.  Again, you will need to talk to your accountant about this, as eligibility can be limited.

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