Loans | Strategic Business Loans

As someone who finances start-up businesses (as well as existing businesses), I often get approached by entrepreneurs looking strictly for investors to finance their business; angel investors, private equity, and venture capital funding. I always appreciate entrepreneurs with the courage to dream about investors being as in love with their idea and start-up as they are. There are, however, other options, that are oftentimes more realistic and attainable. It’s important that business owners truly understand the difference between debt and equity financing and what to consider when making this funding decision for their business.

What is equity financing? Equity financing is giving a portion of ownership in your company to someone in exchange for money; the most common form of equity financing is when a company goes public and sells shares of stock to increase their liquid capital (cash). Equity is the right fit for some situations, but private equity financing can be very difficult to obtain and generally you need to be an established business with proof of concept and revenue before you can attract that type of financing. The number I’ve heard quoted time and time again from investors is that fifteen out of every 1,000 pitches they hear will actually receive any type of equity financing; that’s only 1.5%, meaning 98.5% of those looking for equity capital will never receive a penny from an investor.

What is debt financing? Debt is sometimes looked at as a “4 letter word”, but debt is only negative when it’s used improperly and irresponsibly. Debt is simply money that is borrowed and needs to be repaid, generally with interest.

So, why use debt financing? Since there are so many options available for this type of financing, most business owners can find a capital solution that they qualify for and that meets the needs of the business for both its short and long term goals; it’s generally much more applicable to the needs of the average business owner and allows for more freedom with the use of funds and business decisions. Additionally, since there are many types of debt financing, you can utilize multiple solutions simultaneously, which allows for higher dollar amounts and more flexibility to accomplish your goals.

Something else that is vital to consider: although debt financing is money that needs to be repaid, you’re not giving up a piece of your company. I’ve heard so many stories of people giving up a majority share of their company and then feeling like they’re being held hostage in their own business, or that losing control of something they’ve worked so hard to build. I’ve also seen situations where people give up too much equity for too small of an amount of capital, when if they’d taken a loan to start with instead, they could use that capital to grow their business, making it far more valuable, and end up giving less equity for more money.

You’re a tradeshow manager looking for equipment to help with an upcoming show or you’re looking for equipment to help with you current flourishing business, but, purchasing equipment sounds too costly. It’s until then a coworker suggests leasing equipment from numerous companies. Before you make any final decision, you decide to do extensive research on equipment leasing. What does it mean, is it expensive, and how it is more beneficial are all questions we will answer throughout the article so you don’t have to do endless hours of research.

Equipment Leasing 101

It can be a common mistake to assume leasing and borrowing are interchangeable terms under a business spectrum. One distinctive difference between these terms is the monetary compensation to the lender for leasing equipment. Generally, you pay a flat-fee rate with a fixed interest rate and fixed term. Many companies seek the leasing route compared to purchasing, especially if they only plan to use the equipment in the short-term. Purchasing tends to be more costly and may not be worth a large payment as the equipment will continue to depreciate.

What kind of equipment can be leased? You may be imagining large tractors or machineries as equipment to be leased but equipment can be a broad term and can cover from pcs to vehicles for all types of businesses.

Pros

When leasing equipment, you won’t have to worry about a down payment or collateral unlike purchasing it. There is no requirement to contribute collateral so you will have the liberty to collect your cash and compensate easy payments.
Worrying about an application process undergoing a long strenuous time-frame is all overwhelming, but luckily, leasing equipment is an easier application process. There is fairly less financial paperwork compared to taking out a small business loan.
Leasing equipment offers a couple of flexible terms to choose from after the lease ends:

You can purchase equipment at a fair market value and if you do, the lender will then relinquish the title to you.
If your equipment has come to its last bit of usefulness, you can trade the current item to a brand new equipment piece.
If none of the options above seem ideal to you, you can always choose to do the simple option, return the equipment.

Cons

After you’ve chosen to lease a piece of equipment, you begin your flat fee payments but you will also have to face an effective interest rate alongside it.

Another downside to leasing equipment is the cost of the actual equipment, especially when multiple factors are considered (credit score, annual revenue, age,etc.). There will also be a charge of equipment value and length of use for the equipment.

Need to Lease Equipment?

As we have gone over, equipment leasing provides various benefits for those who need equipment for a shorter period of time. Here at Strategic Business Loans, we offer numerous opportunities from small to big businesses to continue flourishing in their business without a financial predicament. Contact us today for equipment leasing and continue to grow your business.

Debt vs Equity

Equipment Leasing: What Does It Mean?