So you just won a big job, after the initial great feelings of achieving the next level of growth for your company the reality sets in. You now need to deliver the work, on time and in budget.
Often to accomplish both of these you will need labour and equipment. The good news is there are ever increasing methods of financing equipment with many options to consider.
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Operating leases
These are the easiest way to finance quick equipment acquisitions where you lease the equipment for a specific period of time and return everything when you are done with the job. The terms can range from a day to several years depending on how long you think you will need the use.
These leases tend to have higher loan to value ratios requiring minimal, if any, down payments but with higher rates of interest. The lease payments are subject to sales tax and the full amount of the payments are deductible for tax as paid.[/su_column][su_column]
Capital leases
This is a lease to own option where you pay periodic lease payments over a longer period of time but have the option to buy the equipment out for a nominal amount or trade it in at the end of the lease.
The benefit of this type of arrangement is often a larger loan to value ratio requiring a smaller down payment where the cash isn’t otherwise available. Interest rates are generally in line with operating leases and the tax treatment is the same even though is considered an asset for accounting purposes.[/su_column][/su_row]
Traditional financing
A sometimes overlooked option is to have a regular term loan to finance equipment, often offered by a bank or even the manufacturer. The rates can be quite competitive as the lending is secured by the equipment and the terms are over several years.
The company can depreciate the equipment for tax purposes, usually between 20-35% per year depending on the type of equipment with one half available in the year acquired. In addition the sales tax on the equipment can be claimed at the time of purchase and not spread over the financing term.
There are two key considerations in evaluating which option is best for your company when all factors are considered:
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Cash flow
Each company will have differing cash flow needs. Where you need to commit extra resources to funding labour and receivables on a new project up front, then a lease arrangement could be more attractive with a lower down payment and higher loan ratio.
If your company is in the fortunate position to have excess cash on hand a more traditional financing can make more sense as a larger down payment often significantly reduces the interest rate on the loan with more flexible terms for repayment.[/su_column][su_column]
Net present value
Each option will have a different cost to the company over the term of the proposed financing. This would include the after tax effect of lease payments, tax deduction on depreciation, cash flow of financing payments, interest rates and various down payment scenarios.
All of the options should be calculated to produce the net cost today of all factors for each scenario. This enables the company to evaluate the actual costs to the business and compare each option to select the best fit at that time.[/su_column][/su_row]
With low interest rates and flexible financing options it is a good time to grow a company and build assets, knowing your options and their true cost can be a significant savings to the company over the long-term.
