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When shopping for equipment for your business you will be faced with the decision of how  to pay for the equipment. Below are three different payment options and how they may affect certain key factors.

Cash Flow

  • Cash – Purchasing equipment with cash will have an immediate impact on cash flow by diminishing cash reserves.
  • Loan – A down payment is required and the loan payments will generally be higher than lease payments.
  • Lease – There is no down payment required when leasing equipment.  Leasing usually will have less impact on cash flow due to the payments being lower.

Line of Credit

  • Cash – Purchasing equipment will deplete liquid assets which may have an impact on credit.
  • Loan – Taps the line of credit.
  • Lease – Will not affect line of credit.

Equipment Risk

  • Cash – The owner bears all the risk of the equipment devaluing.  Additionally, obsolescence must be tracked by the owner.
  • Loan – Like purchasing equipment with cash, the owner bears all the risk of devaluation and obsolescence must also be tracked by the owner.
  • Lease – In many leases, the burden of taxes and insurance is managed by the lessor.

Asset Liability

  • Cash – Owners must manage asset liability on their books.  Financial accounting requires owned equipment to appear as an asset with a corresponding liability on the balance sheet.
  • Loan – Once again, like purchasing equipment with cash, owners must manage asset liability on their books and are required to have equipment appear as an asset with a corresponding liability on the balance sheet.
  • Lease – Operating lease assets are expensed.  Such assets do not appear on the balance sheet, which can improve financial ratios.

Rate Risk

  • Cash – Cash should be used for income producing investments since you pay with today’s dollars at today’s value
  • Loan – Banks prefer to loan money on a floating variable rate tied to prime.  Rate risk is on the customer, not the bank.
  • Lease – Payments are fixed for the lease term.  Pay with next year’s inflated dollars – take advantage of inflation.

Soft Costs

  • Cash – Soft costs such as installation and training can erode cash reserves.
  • Loan – Banks rarely finance soft costs.  Cash is usually need
  • Lease – Leasing may cover all soft costs including maintenance and software.

Upgrading

  • Cash – Owners must manage the disposal/selling of outdated equipment.  This may slow the upgrading process.
  • Loan – Just like purchasing equipment with cash, owners must manage the disposal/selling of outdated equipment.  Once again, this may slow down the process of upgrading your equipment.
  • Lease – Leasing equipment allows for easy upgrades or additions and by extending the lease term it allows you to keep the same monthly payment.

As you can see there are some similarities and differences in the 3 different types of payments.  Depending on your business’ situation one type might benefit you more than the other.  Providence Capital can assist you with your equipment financing for business.  If you are interested in getting started you can fill out our simple equipment lease application or call 1-800-341-1288 to discuss your equipment financing needs.

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