You have decided to open a business. Whether it is a computer repair shop, a restaurant or an auto plant you are most likely not going to have the capital to pull off opening without signing loan or lease paperwork multiple times. It is important to understand when leasing or asking for the funding form a bank is a better option. This comes in to play a lot with equipment loans.
Do you outright purchase the goods or do you lease them from someone else? How does it affect your finances? Are the terms of the lease better than or equivalent to the loan payment and interest? Pros and cons of both options will way in other decisions you need to make regarding the company so look into the details carefully. The general rule many business owners follow is this: If the item will increase in value over time pay cash or take a loan out to make the purchase but if it will decrease in value you should lease it whether or not you have the cash available to purchase it.
When leasing an item such as a car, which will depreciate as it ages you will find the lease has terms that need to be followed and met. This mostly helps because the financial burden will be spread to a later date. This is helpful in starting up a firm because you are not required to have the capital up front. With a lease much of the financial burden comes at the end.
When you purchase an item often by pursuing a loan you are taking more control over the item. This comes in to play with large items such as buildings. When you purchase a building you take a loan out often requiring a financial down payment and then acquire the property with the loan agreement. It is essentially yours. You accept any increase or decrease of value for that purchase. Purchasing an item with a loan is helpful if you expect that the item will last for an extended period of time. This was you are not paying for it many years down the road when your business is established.
Equipment also changes frequently that is why you will often lease items that change frequently needing your company to upgrade often. Phones, computers, cars and trucks are all examples of items that depreciate and will need an upgrade frequently. These pieces of equipment are all examples of items it is most often better to lease than to purchase. They wear out and frequently need to be updated because of that or advance in technology.
You will find that when looking into equipment loans and/or equipment leases that it comes down to two basic arenas – 1) cash on hand and available to spend and 2) what you qualify for. If you don’t have the cash or the twenty percent to put down which is often needed in an equipment loan than you are going to be leaning more towards leasing until the revenue in your company picks up. Additionally if you can’t qualify for a loan because you are just beginning this venture you will be looking into leasing equipment until you can prove to financial lenders that you are a solid business risk.
Anyhow you look at it there are advantages and disadvantages. Tax professionals might lean you one way or another so before going forward with any business decision no matter how big or small you might think it is bring in your financial gurus for their opinion on the subject.