Every small business owner needs equipment of some kind. Equipment keeps our businesses running, whether it be a POS system, tractor, or something else. Perhaps getting new equipment is one of your business goals, but what's the best approach? 

When it comes to equipment, there are essentially three ways to obtain it— aside from buying with cash: equipment financing, equipment leasing, and equipment renting. We'll discuss these options and the pros and cons of each. 

What is Equipment Financing, and How Does It Work? 

Equipment financing is a type of business funding that allows you to purchase the equipment you need for your business. The lender provides the funds for the equipment, and you repay the loan over a specified period.

It is a convenient option for those who need equipment but don't have the capital to buy it. When you apply for equipment financing, the lender will check your credit score, financial situation, e.g., annual revenue, and the value and type of equipment you are interested in purchasing. 

If you're approved, the lender will generally pay the vendor directly. You will then pay the lender for the equipment, including the principal and interest until you pay in full. At that point, you'll own the equipment outright! Financing is a good option when you use equipment frequently for an extended time, and it will not become obsolete quickly. 

Equipment financing is undoubtedly a popular option, but there are both pros and cons to consider.

Pros of Equipment Financing 

Some of the positive aspects of equipment financing include the following: 

• Access to Equipment Without Paying Full-Price Upfront: Equipment financing provides quick access to the necessary equipment without you having to save up the total price. 
• Preserves Cash Flow: Because you don't have to pay the price in full, your cash flow will take less of a hit, and you can use it on other operating expenses.
• Tax Benefits: In some cases, the interest paid on equipment financing can be tax deductible, but be sure to consult your accountant on this. 
• Custom Payment Options: Equipment financing companies offer various payment options, allowing businesses to choose a long-term plan that works best for their budget and cash flow.

Cons of Equipment Financing 

Some downsides to equipment financing include the following: 

• Interest Costs: As with all equipment loans, you’ll pay interest, which can be expensive over time.
• Risk of Obsolescence: Equipment can become outdated quickly — especially technology. If you finance, you may still be paying for equipment that is no longer useful.
• Potential for Repossession: If you fail to make your payments, the lender may have the right to repossess the equipment.
• Reduced Flexibility: Once you sign the contract, they may not have the flexibility to change or upgrade it without incurring additional costs.

What is Equipment Leasing, and How Does It Work? 

Another option is to lease your equipment. With equipment leasing, you can use the equipment for a specified period, usually for a fee. Instead of buying the equipment outright — or financing it — you lease it from a leasing company, which still owns the equipment. 

The two main types of leases are operating leases and capital leases. Operating leases are short-term, which is similar to renting. You can return the equipment with notice before the lease is up. Capital leases are long-term leases that business owners pursue if they use the equipment daily for a long time.  

The lease agreement outlines the lease terms, including the lease's length, the monthly payment amount, and any conditions or restrictions on the use of the equipment. You must use the equipment responsibly and follow any rules set by the leasing company.

At the end of the lease, you can return the equipment to the leasing company, purchase it for its fair market value, or renew the lease agreement for an additional period. Leasing may be a good option if you want to upgrade your equipment on a routine basis and don't need to use it as collateral for other loans. 

Pros of Equipment Leasing 

Some of the pros of equipment leasing include the following: 

• Low Cost: Some leases come with little to no down payment.
• Flexible Payment Options: Leasing companies often offer flexible lease payment options, allowing you to choose the best plan for your budget. 
• Easy to Upgrade: When your lease ends, you can upgrade to newer equipment without the hassle of selling the old equipment.

Cons of Equipment Leasing 

Some of the cons of equipment leasing include the following: 

• Reduced Ownership: Leasing equipment means that you do not own it and may not have complete control over its use. 
• Potential for Penalty Fees: If you don't follow the lease agreement terms, you may incur penalty fees or have the lease terminated early.
• Ongoing Maintenance: Even though you're leasing, you're expected to maintain the equipment. 
• Does Not Build Equity: Because you are leasing, you are not building equity in the equipment.  

What is Equipment Renting, and How Does it Work?

The last option is to rent the equipment from a rental company. Instead of signing a short or long-term contract as with a lease or financing agreement, renting allows you to use the equipment for a short period. While much more concise than a lease agreement or loan paperwork, you'll have to sign a rental agreement. 

The rental agreement outlines the rental terms, the daily or weekly rental fee, and any conditions or restrictions. As with a lease, you must responsibly use the items and follow any rules the rental company sets.

Once you're done, you return the rental equipment and move on with your life! There's no pressure to lease or buy — usually. Renting is best when you only need a piece of equipment for a short time or periodically. 

Pros of Equipment Renting

Pros of equipment renting include the following: 

• Low Upfront Costs: Renting equipment requires minimal upfront costs, making it a good option for businesses with limited funds.
• No Responsibility for Maintenance: The rental company is responsible for maintaining the equipment, freeing you up to focus on the work. 
• No Long-Term Commitment: Renting equipment allows you to use it for a short time without the long-term commitment of ownership or leasing.

Cons of Equipment Renting 

Here are some downsides of renting equipment: 

• Limited Use: The equipment is only available for the rental period, which may not be enough time for some businesses.
• Lack of Ownership: Renting equipment means you do not own the equipment and cannot use it after the rental period ends — unless you rent again. 
• More Expensive Per Use: Because you're using the equipment for a limited time, rental companies charge more per use than you would pay if you bought or leased.

Which Option is Best for You? 

When considering your options, here are some questions to consider:

• What is your current financial situation? How much can you afford to pay each month?
• How often will you need to get new equipment? 
• How quickly will the equipment become obsolete? 
• How often will you use the equipment? 
• What are the maintenance costs of the equipment? 
• Do you want or need to own the equipment? 

At Midwest Business Funding, we pride ourselves on being honest because we see ourselves as partners in your business. We want you to succeed, and we offer some of the best equipment financing options in the industry. 

That being said, it's not for everyone. Leasing or renting may be better for your situation. Apply now, and we can help you decide what is best for you!