One of the most frustrating aspects of running a small business is when the equipment that you have got to work with doesn’t match your ambitions.
Outdated or malfunctioning equipment can hold your business back but if you are like most small business owners you might worry about how to fund your upgrades without hurting your bank balance too badly.
Here is an insight on some financing solutions that could work for your business, including a look at some of the key questions you need to ask yourself, the pros and cons of buying or leasing, and why the lifespan of the equipment is an important consideration.
Consider the lifespan of your equipment
The sort of equipment you need for your business will make a difference to how you estimate the expected lifespan, but the fundamental question that you need an answer before you even consider your financing options, is how long do you expect the life cycle to be?
If you are talking about computer equipment, it is worth remembering that computing power often doubles in size every couple of years or so, which means that you will be looking at frequent upgrades to stay up to date.
If you are looking at equipment that has greater longevity, you can learn about it at Reliant Finishing Systems, for example, to gauge how long you can anticipate the equipment to perform before you need to consider updating or replacing it.
You need to anticipate the lifespan of any equipment you are using so that you can plan for updates and remain competitive in terms of technology.
The case for buying outright
The simplest approach to getting the equipment is to arrange to buy it outright out of your available cash reserves.
If you have strong cash flow and money in the bank it would seem a fairly straightforward decision to buy the equipment without the need to apply for any sort of finance. But there are several aspects to buying outright that you need to consider and it might be wise to talk to your accountant about your options before committing to this route.
You enjoy full ownership when you buy any item of equipment outright but there is the prospect of depreciation to consider which will impact on its value, and you are then in a position where you might have to try and sell the item before being able to buy a replacement.
You could also make a large hole in your cash flow if you buy equipment outright when there might arguably be better uses for your money as you try to grow the business.
Financing your purchase
If you are looking to make a more substantial purchase for equipment that has a high price tag attached, it makes sense to consider your options in terms of raising finance to fund the acquisition
A long established method for financing the purchase of equipment is a basic term loan.
You will probably be asked for security against the loan which might involve using the equipment itself as collateral or you might be asked to provide some other form of security against default.
It is normally possible to claim the interest costs of the loan as well as the depreciation as an allowable tax deduction.
The period of time you take the loan over on a term loan will often reflect the anticipated worthwhile lifespan of the equipment, so it is often the case that you will be borrowing the money over a term of between 2-3 years on average.
One of the advantages attached to a term loan is that you own the equipment outright after the loan has been paid, although it does leave you with a depreciating asset that you might have to sell before you can upgrade to a newer option.
Flexibility of leasing
If you decide to lease the equipment you won’t own it unless you are offered the chance to pay a premium at the end of the lease term to take up a potential purchase option.
Although you are renting the equipment when you lease it, this does give you the flexibility to change and upgrade with greater ease than if you own the item outright.
You might also find that there are some tax advantages attached to leasing rather than buying. It would be a good idea to talk to your accountant about the pros and cons of leasing and get their opinion on which option might work well for your business and future plans.
Working out your finance options and planning ahead in terms of what equipment you need now and in the future, will all make a difference to how you manage to grow the business.
Thomas Sharpe has first hand experiencing running an industrial business where broken machinery meant delays and lost profit. He shares his business insights online for a selection of business blogs.