When your business encounters a period of growth, the purchase of new equipment becomes an essential step in order for you to continue your business activity in an optimal way. Machines, tools, professional vehicles: investing in equipment has a cost, and few companies have enough immediate cash to face it!
This article is here to shed some light on the different existing means to finance your equipment in order to choose the one that suits you best.
Financing your Equipment: Yes, But How?
To finance the acquisition of new equipment, you must choose between several options, all of which have specific advantages and disadvantages.
Also called “equity financing”, self-financing consists has to do with a company drawing on its cash reserves in order to acquire an asset. Self-financing grants a certain independence to the company since it does not entail the payment of interest.
The acquired equipment belongs entirely to the company: it is free to use it as it sees fit and to resell it when it wishes.
The cash flow (and therefore the immediate financial structure) of the company can be weakened depending on the amount invested.
From a tax point of view, financing your equipment in this way is less profitable since it does not involve financial interest to be deducted from the taxable result.
It is the most common solution in business in order to obtain the necessary sums to finance the needed equipment.
The principle: the bank undertakes to remit to the company a certain sum which will be reimbursed with additional financial interest over a predetermined period.
Interest payable to the bank during repayment of the borrowed amount is deductible from income tax.
Professional credit is external financing: it therefore does not engage the company’s own funds and does not impact the company’s immediate cash position when the property is acquired.
It is rarely easy to obtain professional credit. Convincing a bank to grant professional credit is a long-term job: a solid loan file must be established upstream in order to be able to negotiate the most attractive rates and deadlines. The challenge is to convince the financial institution that the company will be able to repay the amount borrowed within the allotted time.
Interest represents additional fixed costs that can strain the company’s liquidity over the long term, which can create difficulties if you do not have sufficient visibility of your cash flow.
Banks systematically require a contribution from the company as well as a personal guarantee or a guarantee on the company’s own assets before granting professional credit.
Long term rental
Leasing property from a professional rather than buying it in due form is common in business, especially when it comes to professional vehicles. The good in question is given to the company for a fixed period (generally between 3 and 5 years) in return for a monthly payment.
Renting a property allows you to leave the administrative formalities to the lessor, especially with regard to insurance – this allows the company to concentrate on its activity in the event of a problem.
Monthly rental payments are generally more lenient to a company’s cash flow than loan repayment and possible interest.
As the rental period is to be determined when signing the contract, renting a property represents a lower commitment on the part of the company, which may decide to change the property or even the service provider if it is not satisfied.
The monthly payments linked to the rental contract are considered as charges – in the same way as the interest on a loan, they are therefore to be deducted from the taxable profits of the company.
A leasing contract works on the same principle as a rental over a period generally between 3 and 7 years, but offers an additional subtlety. In fact, once the contract has expired, the company has three choices. The company can:
- Extend the term of the contract and continue to rent the property in question.
- End the contract and return the property.
- Buy back the property: the leasing contract is accompanied by a promise to sell from the lessor. The surrender value is equal to the residual value of the asset once the contract expires, i.e. the price of the asset from which we deduct the payments already made.
It should be noted from an accounting point of view that assets leased under financial leasing are recorded as fixed assets, and appear in the balance sheet as a debt equivalent to the amount of drafts paid and the surrender value indicated in the contract.
Bonuses, aids, and subsidies
There is a multitude of financial aid that a company can obtain to finance its equipment to support its development from the State, regions, and municipalities but also from private organizations.
This type of financing does not include any additional charge.
The steps necessary to obtain financial aid take a long time to come to an end and do not make it possible to face an immediate cash flow requirement.
Some examples of equipment financing in businesses
- The commercial vehicles (vans, company cars): Long-term rental is the preferred solution for many companies wishing to acquire a fleet thanks to the financial and administrative flexibility offered by the rental agreement.
- Industrial machinery: Many companies are opting for leasing for the acquisition of such property. Indeed, resorting to this method of financing is a good way to deal with the loss of value undergone by machine tools due to wear or obsolescence.
- The hardware: The speed with which technology advances in this area makes the self-financing of the computer equipment of the company misguided, that’s why leasing is often favored by companies. This solution makes it possible to regularly renew IT equipment at a lower cost.
- Commercial premises: As a long or even very long-term investment, the purchase of the premises necessary for the activity of the company most often requires a professional loan.
Fincue is an Australian-based lending platform using a ‘loan as a service’ platform and mobile technology to connect borrowers to lenders. Speak with us over your business equipment and we will provide you with the best guidance about securing financing for its acquisition. We will provide your with finance to purchase the equipment using the LaaS platform. Call us today.