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If your business requires expensive tools and machinery, you may find yourself in need of asset finance. Asset finance allows you to acquire or use assets without having to pay in full up front. It gives you the funding you need to purchase or lease assets you’ll need to operate your business while preserving your capital and managing your cash flow.

Should you consider asset finance?

Asset finance makes sense for many businesses. Even if you have enough cash saved to buy the asset, you may need that capital to finance continued operations or explore new growth opportunities.

The flexibility of asset finance options (with different cash flow and financial implications) can allow you to pay back these large assets over time. It also gives you access to modern assets, which enables you to remain competitive without incurring the upfront costs.

Decide what assets you need

Start by listing the assets you need in your business to:

• Operate more efficiently, possibly by using the latest technology to enhance your operations or by using additional equipment to help with current operations.
• Grow, especially if new equipment will enable you to scale your business or increase your capacity.
• Become more competitive by enabling your business to match the capabilities of your key competitors.

Calculate your return on investment (ROI)

It’s important to make a case for each asset purchase. Investors and lenders may want to see the evidence that the asset is necessary for your business, but it also helps you make the right decisions. The easiest method is to take the cost of the new asset and divide it by the number of years you believe it will last (adding any yearly maintenance and support costs). This is the dollar amount the new asset needs to generate in increased sales, better capacity, more capability, or whatever measurement you deem important for that piece of equipment.

Ask your staff how valuable a new piece of equipment will be to helping them carry out their responsibilities. If they feel it would be beneficial, that’s a good sign you should consider obtaining it.

Should you lease rather than buy?

Sometimes leasing an asset can make more sense than owning it. For example:

• A lease agreement that includes upgrading fast-changing technology such as computers at agreed intervals can make more sense than owning these items. You don’t want to be stuck owning equipment with little resale value.
• Leasing expensive production machinery when you know that more efficient models will be coming shortly makes better sense than buying the machinery and then facing additional costs to compete with others.
• Leasing vehicles such as trucks can give you more flexibility than buying the vehicle, especially if demand is seasonal and surplus trucks would be standing idle.
• Leasing equipment that quickly becomes obsolete can sometimes allow you to upgrade once the term ends for the latest version.

Speak to your accountant or financial advisor about any tax implications before deciding to buy or lease.

New assets vs. second-hand

Sometimes it makes sense to purchase already used tools and machinery. Start-ups especially need to save every dollar to market and grow their business, and there are often many options for assets that have been used and well-taken care of. Most businesses can save considerably on everything from office furniture to production equipment by attending local auctions, bidding on online auction sites, attending local closing-down sales, and talking to others in your industry who may be selling items they no longer need.

Borrowing to own

It’s usually cheaper in the long run to buy an asset outright than to lease. Taking out a bank loan can be an effective way to finance business equipment purchases that you need, especially if it’s important that you own the asset from the outset.

Loans won’t tie up your capital and may not require additional security. The loan should be structured to match the expected life of the asset – long-term loans for long-lasting assets, such as a building, and short-term loans for assets with a shorter useful life.

Common Asset Finance Options for Small Businesses

Once you know what equipment or machinery your business needs, the next step is choosing the right way to finance it. The best option often depends on how long you expect to use the asset, whether you want to own it, how quickly the equipment may become outdated, and how the monthly payments will affect your cash flow.

Equipment Loans

Equipment loans are often used when a business wants to own the asset. The equipment itself may help secure the loan, and payments are typically spread over the expected useful life of the asset.

Equipment Leases

Equipment leases may make sense when the asset is likely to become outdated, when you need flexibility, or when you do not want to commit to owning the equipment long term.

Term Loans

Term loans can be useful for larger purchases where the business wants predictable monthly payments over a set period.

Business Line of Credit

A business line of credit may be better for smaller or recurring equipment needs, repairs, attachments, or related costs, but it may not be the best fit for major long-term purchases.

Vendor or Dealer Financing

Vendor or dealer financing may also be available when buying machinery, vehicles, or specialized equipment. These offers can be convenient, but it is still important to compare the interest rate, fees, repayment terms, and tax impact against other options.

Before choosing an option, review the full cost of financing, the useful life of the asset, expected maintenance costs, tax treatment, and whether the purchase will actually improve profitability or efficiency.

Talk Through the Numbers Before You Commit

If your business is considering a major equipment, vehicle, or machinery purchase, we can help you evaluate the numbers before you commit. Contact Laura M. Mikeworth, CPA, P.A. to discuss the cash flow, tax, and financing considerations behind your next asset purchase.

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