As a small business owner equipment financing is an important aspect of your small business finance you should not overlook.
sometimes you are face with the option of getting finance for your equipment. Under Equipment Financing we are going to look at different ways of financing your small business equipments.
Lease is a process by which a small business obtains the use of certain fixed asset for which it pays a series of contractual and periodic payment.
Lease is a great source of low-cost finance for a small business. Lease financing is tired to particular equipment and so the finance cannot be directed to working capital. What it does is that it reduces operating capital needed.
Be aware that lease financing is generally more expensive than revolving bank debt. This is because lease payments have built in interest.
One advantage of lease is that it is secured by the equipment being leased. Many equipment vendors won’t require collateral because of this. If your default you will forfeit any payment made and the equipment.
Lease financing is cost effective and its a very good source of small business equipment financing. Another advantage of lease is that the leasing company claims the capital allowance and pass some of the benefit on to the business customer by way of reduction in rental charge. In addition to this the business customer can generally deduct the full cost of lease rentals from taxable income as trading expenses.
In lease financing there is no intention to buy the equipment. The intention is to use the equipment for a particular period of time.
The fundamental characteristics of lease are that ownership never passes to the business customers.
Hire purchase is a system used to finance small business equipment that involves spreading the cost of the equipment over a period of time. It is also called a closed end leasing. Where a small business cannot afford to pay the cost of equipment as a lump sum but can afford to pay a percentage ass deposit it can go into a hire purchase agreement. In a hire purchase agreement the business pay a percentage of the equipment as deposit and pays the balance as a monthly rent. When a sum equal to the original full price plus the interest has been paid in equal instalment the buyer may then exercise an option to buy the equipment at a predetermined price (usually a nominal sum) or return the equipment to the owner. If the buyer or small business default in the paying the instalments, the owner of the equipment may repossess it.
In Canada, United state and Nigeria hire purchase is termed as instalment plan. Return to home page from Equipment Financing
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