Things like overspending, unrealistic expansion plans, and poor pricing strategies can put your small business at risk. Speaking of overspending, some of the most significant investments you will make involve capital equipment such as machinery, vehicles, computers, office furniture, and technology, to name just a few. Equipment is expensive and can deplete your savings quickly. However, equipment financing is a widely-used and cash-flow-friendly alternative to a one-time purchase. You might be asking this question: What is equipment financing? If so, this blog post from Balboa Capital has all the information you need.
Overview: What is equipment financing?
Equipment financing, also referred to as an equipment loan, is a straightforward concept. A lender extends you funding to finance a piece of equipment, and you repay the lender over a specific term. Your equipment financing plan’s structure, rate, and term will be based on your financial situation (credit rating, annual revenue, etc.) and the lender you choose. Many different lenders offer equipment financing.
If you do not make your monthly payments on time or stop making them altogether, your equipment can legally be repossessed. In addition, your account will be sent to a collection agency that will contact you to ask for payment. Your credit rating will take a hit, which can limit your future borrowing power. So, manage your finances wisely and make your payments on time each month.
Financing can preserve capital and credit lines.
You know the importance of having enough cash in the bank to pay your employees, purchase inventory and run a marketing campaign. And let us not forget the cost of office space, information technology, and legal fees. All of this puts a strain on your finances and can cause undue stress.
This might prevent you from investing in the capital equipment that your small business needs to grow and stay competitive. Equipment financing preserves your capital and, as a result, might be able to help alleviate any financial concerns you have. In addition, you can get the equipment you need for a predictable monthly payment.
Financing gives you access to innovation.
If you have looked at the latest piece of equipment and thought, “there will be a newer, better version coming out soon,” you are not alone. Millions of entrepreneurs put off equipment purchases because they do not want to be stuck with something that might become obsolete. Equipment financing gives you access to the latest makes and models, even those you initially thought were out of your price range.
And when you finish making the payments as required in your equipment financing agreement, you can upgrade to newer and more advanced equipment and stay ahead of the technology curve.
Financing lets you forget about resale values.
When you buy a new automobile, its value drops the minute you drive out of the lot. Over time, the value of your car or truck will decrease. The same thing happens when you buy equipment for your small business. Its value depreciates the longer you own it, and selling it in the future can prove to be quite tricky and time-consuming. When you finance equipment, you do not need to worry about the resale value because, as mentioned earlier, you can opt for a newer, more up-to-date version when your financing term expires.
Financing may offer tax advantages.
When it comes time to do your business taxes, there is nothing better than being able to deduct the cost of equipment. The Section 179 tax deduction lets you do this if your equipment is eligible. In 2022, this IRS tax ruling allows business owners to deduct up to $1 million worth of qualifying equipment purchased or financed and put into use before midnight, December 31, 2022. In addition, bonus depreciation is an additional tax benefit that you might use. It lets you deduct a percentage of the cost of the equipment. The current bonus depreciation limit in 2022 is 100%, and it will decrease to 80% in 2023.
There are guidelines to follow with the Section 179 tax provision, and not all types of equipment are eligible for the deduction. Make sure you consult with your accountant before purchasing or financing any equipment. They have the knowledge and expertise to provide you with recommendations relating to equipment acquisition and income taxes.
Today’s uncertain economy, along with increased competition, is presenting challenges to small businesses across the United States. As a result, they are looking at ways to reduce their operating expenses without affecting their productivity or compromising their service level. Equipment financing helps business owners acquire much-needed equipment by lowering the upfront costs. The monthly payments are predictable and manageable, and the equipment can help generate profits right away.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.