Small businesses that require heavy equipment and plant machinery for their core business operations face the big challenge of financing. When it comes to buying/leasing, replacing, or upgrading heavy equipment and machinery, it is most often difficult to pay for the expenses out of pocket or bank account right away. Even if a small business can afford them, it is not the best way as it needs to keep the cash flowing for day-to-day business operations.
So, today, we are sharing this post to help you get familiar with financing options before you contact any Heavy Equipment and Plant Machinery Suppliers.
Loans and Leases for Heavy Equipment and Plant Machinery
The most common types of financing for heavy equipment and plant machinery are loans and leases. While they are similar in terms of interest rates, monthly payments, and term lengths, they are different concepts and have different governing rules and laws.
Heavy Equipment Loan
A small business heavy equipment loan is generally used for Purchasing Heavy Equipment. The term length of heavy equipment loan usually lasts between 3 to 7 years and some may also last for 10 years. In the majority of cases, you are expected to make down payment of around 15% of the total cost of the equipment. While they are considered better options because of better rates, they cover only a smaller percentage of the total costs when compared to a lease.
Heavy Equipment Leases
An equipment lease is typically meant to buy or rent the equipment. Equipment leases are categorized into two broad categories:
- Capital leases
- Operating leases
Capital Leases for Heavy Equipment
A capital lease is not the same as an equipment loan even if it serves many functions similar to equipment loan. A capital lease is used to buy the equipment but doesn’t usually require a business owner to make a down payment and covers the entire cost of the equipment with terms ranging from three to five years.
To the surprise of many, heavy equipment leases come in the form of $1 (or the specified amount) buyout leases or 10% purchase option leases, and you have both options to choose from at the end of the lease.
The value is too low because a capital lease assumes that you will purchase the equipment in the end. Therefore, equipment on capital leases is also considered an asset for tax purposes. This option is highly suitable for equipment that won’t go obsolete shortly and depreciates at a slow rate.
Operating Leases for Heavy Equipment
Operating leases are similar to capital leases but are meant for short term lengths, for instance, two years. In the end, you can choose to purchase the equipment at a fair market value, return it, or renew the lease. Based on the terms of your operating lease, the equipment may or may not be counted as an asset for tax purposes.
So, if you are finding it challenging to acquire heavy equipment and plant machinery for your small business, talk to a financing consultant about your financing options, your bank, or get help even from a reputable Heavy Equipment and Plant Machinery Supplier to provide you with some referrals.