Celtic Bank Blog

A Simple Starter on Equipment Financing for More Cash and Less Tax

Are high equipment rental or repair costs eating away your profits? The right equipment can be vital to the success of your business. But when it isn’t financed correctly, pricey payments can take your hard-earned cash flow to uncomfortable lows. Soon, the money you invested to grow your business is going back into paying off the loan, and you’re left with little funding to expand. So how do you know which equipment financing option to choose?

Should you buy or lease? If you buy, what type of loan should you apply for (SBA, term, equipment…)? And if you lease, which of the many lease options should you choose? It can all get overwhelming… fast!

We’re here to help you understand clearly what your options are and make the most fiscally-sound decision for your business. In this introductory post, we’ll cover how the right equipment can grow your business, what equipment financing can be used for, and when it’s beneficial to do so. (And if you're looking to go deeper, check out our free, downloadable guide: Equipment Financing: A Small Business Owner's Guide to Loans, Leases, and Lending.) 

EQUIPMENT MEANS GROWTH

Remember those people you knew growing up—the ones who would wear the same pair of shoes for years until the tread was gone and the sides were split and the bottoms were held on with super glue? Maybe that person was you.

Believe it or not, some business owners use the same approach for their equipment. And while that strategy may work for a favorite pair of tennis shoes—it almost never works for small business equipment. Keeping your equipment up to date is integral to your overall business success.

Businesses that have the latest equipment produce more products and services, process more orders or invoices, and ultimately save more time, which can dramatically impact your costs.

By getting the equipment to automate certain processes, you free up employees to focus on more important and profitable tasks throughout the day. Plus, with the right equipment, you may end up needing fewer employees, or fewer hours worked, saving you labor and benefit costs.

Updated equipment also helps you keep pace with your competitors. As competing businesses continue to update equipment and speed up their processes, you need equipment that can keep up. Your quick turnaround time will keep your customers happy and your costs manageable (and competitive!), too.

Still, knowing all of this doesn’t change this single fact: equipment is expensive. If you have the money to buy new equipment, can you really afford to do so without hurting your cash flow? How do you fund these equipment upgrades and still come out on top? Enter: equipment financing. 

BASICS OF EQUIPMENT FINANCING

Equipment financing enables small business owners like you to get the funding you need to upgrade your equipment at a cost you can afford. It uses the equipment you’re purchasing as collateral against the loan, saving you money and hassle. There are a lot of different solutions you can choose from.

Let’s explore more about how equipment financing can help you get the equipment you need to outpace competitors—without draining your bank account or killing your cash flow.

THE BENEFITS OF CHOOSING EQUIPMENT FINANCING

Let’s imagine for a minute that you can afford to purchase your new equipment upfront—without using any sort of financing. Would you be surprised to learn that it still may be in your best interest to obtain the equipment using a financing solution instead of paying cash? For example:

Rob owns a thriving dry cleaning business. To open up space in his tiny shop, Rob wants to replace two of his machines—a shirt body press and a sleeve press—with a combination body-sleeve finishing press. He found one for just under $58K, and he has the money to pay for it upfront. But Rob has some concerns:

If he buys the machine, he’s cleared out a significant chunk of his cash cushion for his business. If a slow season hit or some other machine were to break, he wouldn’t have the money to get by. Also, a purchase that big would significantly affect his cash flow for the next few months. Money would be tight, and that’s always stressful. What should he do?

In this case, it might make sense for Rob to use an equipment financing option like an equipment loan, or a small SBA loan, to cover the cost of the finishing press. In doing so, he doesn’t put his business in jeopardy through rocky cash flow seasons or low business savings. And since his business is successful, and his credit is good, Rob’s likely to find a lower interest rate for his equipment loan and have no problem paying it off over time. So for Rob, using equipment financing allows him to maintain financial stability as he continues to upgrade his business.

And there’s another major benefit to using equipment financing options: tax breaks.

Taxes and your equipment loans

Depending on the type of financing you choose, you may be eligible for some tax breaks. We'll look at the effects of both buying and leasing equipment on your taxes—helping you see which perks are right for you.

Buying Equipment

Why buy? Well, there are a few different benefits of buying your equipment when it comes to taxes. Some benefits are for buying the equipment, and others are for the loan itself.

To help encourage small business spending, the federal government offers deductions on both new and used equipment purchased for small businesses. This is referred to as the Section 179 deduction. Up to $500K can be deducted from your equipment purchase, with extra incentives for buying new. Let’s look at an example for a new equipment purchase this year:

 

Original equipment purchase:   $720,000
First year write-off:  -$500,000
Bonus depreciation deduction:  -$110,000
Normal 1st year depreciation deduction:
Total first year deduction
 - $22,000
  $632,000

 

Assuming a 35% tax bracket, this would mean you’d have $221,200 of cash savings on your equipment purchase in the first year alone. Which takes your $720,000 equipment purchase to $498,800. This doesn’t even include the depreciation deductions you’ll get in the years to come, just for buying the equipment. And—it’s important to note—that these benefits aren’t just for physical equipment. Technology and computer software are also eligible for these deductions.

Clearly, buying has its benefits.

Now—why use a loan for it? Loans also come with tax benefits. The money you’re loaned doesn’t count as taxable income. So you won’t face crazy high taxes for taking out a large equipment loan. And the interest on your loan may be tax deductible. More savings and more cash back for your small business.

Leasing Equipment

Buying equipment isn’t right for every business. Depending on the equipment, you may want to lease. In which case, don’t worry! There are tax breaks for you, too!

Small business owners are generally able to deduct the rental costs they pay from leasing the equipment for their business. Again, saving you money in the long run.

To do this, make sure when you set the terms of your lease that this is truly a lease agreement—not a purchase paid in installments or a conditional sale. Since the tax rules for those are different, trying to pass off a conditional sale as a lease can have serious repercussions from the IRS. The best thing to do is work with your loan officer to set the terms, then see a paid professional accountant to make sure those are being accurately recorded on your taxes.

Whatever your equipment needs are, chances are there’s a way to finance it. To learn more about equipment financing strategies, requirements, and uses, check out our online resource, Equipment Financing: A Small Business Owner’s Guide to Loans, Leases, and Lending, available now!

Facts and data presented in this guide are for illustrative purposes only. Celtic Bank applicants are subject to our credit and underwriting standards to determine credit worthiness. Interest rates, fees, terms and conditions are subject to change at any time without notice and will be disclosed upon final loan approval. This solicitation is not a guarantee of qualification. 

 

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