Businesses typically choose to finance equipment when they wish to achieve one or several of the following objectives:
- 100 Percent Financing
A lessee or borrower (sometimes collectively called a "customer") may be able to arrange 100 percent financing of equipment. Costs include hard costs such as the equipment and soft costs such as shipping and taxes, design costs, installation costs, transportation fees, training fees, software, and any service contract fees.
- Preservation of Capital
Making large capital expenditures in equipment often represents major financial risk, especially for small companies. Equipment financing can help mitigate the uncertainty of investing in a capital asset that may enable a business to achieve its desired return, increase efficiency, save costs and apply capital to more pressing needs of its operations.
- Hedge Against Inflation
Equipment financing may hedge inflation risk. For instance, instead of paying the total cost of equipment at once and large down payments, a business may delay the use of its funds until the date on which it makes a lease payment. The delay makes its cash worth less to the lessor because of inflation. The business also gets to use its cash during the lease term instead of spending it up front on a purchase. In addition, either a lease or loan can lock in the rates that exist on the date of the closing. In other words, the finance company absorbs the devaluation of a customer's payments over time due to inflation and other financial risks.
- Improved Expense Planning and Business-Cycle Flexibility
Financing equipment helps maintain cash flow and greater certainty in budgeting by setting customized rent payments to match cash flow Ð even seasonal cash flows.
- Regular Technology Updates
By funding technology equipment under leasing, loan or other financing, companies are often able to acquire more and better equipment than they could have without financing. Certain leasing finance programs can also allow for technology upgrades and/or replacements within the term of the lease contract.
- Tax Considerations
Tax-oriented leases should produce lower rents since the lessor retains title and depreciation. A tax-oriented lease refers is a transaction that includes the value of tax benefits. Conversely a conditional sale or loan enhances tax benefits of higher deductions to the lessee/borrower
- Relationships with Equipment Experts
Some finance firms offer equipment, software and/or services as a bundled financing, improving cash flow and shifting risk to the equipment finance company in many cases.
- Obsolescence Management
When a lessor owns the equipment in a true lease, the lessor bears the risk of the equipment used by a business becoming obsolete.
- Dependable Asset Management
Many financing companies can help track the status of equipment, know when to upgrade or update it, and can provide services relating to installation to use, maintenance, de-installation and disposal of the equipment.
- Product and Service Bundling
Certain financial products allow customers to finance the entire cost of equipment, including installation, up-front maintenance, training, and software charges, thereby packaging systems and ancillary products and services into a single, easy-to-manage solution.
- Equipment Disposal
Equipment management by a third party, such as an equipment financing company, should enhance the ability of a business to focus on its core operations. In the case of computers and other technology devices, these companies may also agree to dispose of equipment. This service should prevent the lessee or borrower from incurring legal penalties for improperly disposing of such assets because disposal is often regulated by federal, state and local governments.