Financing Equipment: What to Know
For contractors who need to purchase construction equipment, but do not have the capital, financing or leasing may be easier than you think. Equipment financing provides small to medium size construction companies the opportunity to acquire necessary equipment when paying for it outright is not an option.
Similar to financing a car, equipment financing entails qualifying for the loan and applying to a lending institution. Depending on your credit, you may be able to finance 100% of the loan, or you may have to make a down payment. Once the loan is paid, you own the equipment. The leasing process is also similar to leasing a vehicle; you pay monthly for the equipment, then at the end of the lease period, you either pay the remaining balance or end your lease.
Whichever way works for your business, financing or leasing equipment is ideal for getting the equipment you need for your job without the upfront costs. In today’s uncertain economy, borrowing the money to pay for needed equipment helps keep your cash on hand and available when needed.
Loans and Lenders
There is a difference between heavy equipment loans and regular equipment financing. But whether you are going for a small-medium equipment loan, or have your eyes on something larger, there is a loan option that can work for you. If you’ve had enough of constantly renting this equipment and you’re ready to own, you’ll probably want to go with a loan.
To qualify for larger loans, some lenders will look at your credit score, cash flow, and potential down payment. General rules for this type of lending indicate that if you have been in business for at least one year and have decent credit, you will qualify for a loan. With less than decent credit, you may have to provide a down payment and will likely pay a higher interest rate. However, equipment loans are not hard to qualify for, and the equipment itself acts as collateral.
To Lease or Not to Lease
If you aren’t ready to commit to owning a riding trowel for the long-term, consider a lease. With a lease, you can get new equipment for a period of time and pay monthly. At the end of the lease, you must purchase the equipment, renew your lease (perhaps with an even newer model), or end the lease and return the machinery. You are essentially renting your equipment. Leasing is a good option if the equipment you seek becomes outdated or obsolete quickly, or if you only need the equipment for a particular timeframe or specific long-term job.
Financing and Taxes
The process for acquiring an equipment loan is like any loan. You will need to provide financial and bank statements, tax documents, identification, etc. Banks offer these loans, as do online lenders, and the process for each is different. It is recommended to shop around for good rates. The repayment terms and the interest rates will come from the lender; generally, rates range from 8% to 30%.
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In terms of tax deductions, the IRS is here to help in a big way. The Section 179 deduction allows businesses to deduct the full purchase price of qualifying equipment or financed during the tax year. In other words, if you buy or lease equipment, large or small, you can deduct the full purchase price from your gross income in the first year, (up to a certain limit) or choose to deduct a certain portion up front and depreciate the balance over subsequent years. Remarkably, it is one of the few small business incentives from the federal government.
There is a deduction limit of $1,000,000 and a spending cap of $2.5 million, but if you can stay within those broad parameters, this could be a game-changer for your business.
For 2020, all businesses that purchase, finance, or lease new or used equipment between January 1-December 31, 2020 should qualify. Check here to calculate your tax savings options.
If your business does not qualify for the Section 179 deduction, you may write off the loan or lease payments as a business expense or depreciate the equipment on your taxes.
One the biggest misconceptions is that leasing or financing your equipment excludes you from Tax Savings.
However…when businesses finance equipment using a $1 purchase option lease or an Equipment Finance Agreement (EFA), allowing them to pay for it in installments over several years, they can deduct 100% of the purchase price on their federal return in the tax year in which the equipment, including used equipment, is put in service. Always be sure to consult your tax adviser to determine if you qualify for tax breaks.
5 Tips for Financing Construction Equipment
- Identify Your Equipment Needs: If there’s a piece of equipment that will accelerate the pace of your project or benefit your business in the long run, but you can’t afford to pay for it, consider a loan.
- Understand Financing Options: One option is to lease the equipment and pay it off at the end of the lease or upgrade to something newer. Or pull the trigger and make the purchase. Many loans don’t even require a down payment (dependent upon credit).
- Know the Terms: Collateral—When financing equipment, the lender often uses the equipment itself as the collateral. The lender will take back the equipment if you default on the loan. Term Length—These will vary depending upon the lender. Interest Rates—Rates fall between 8% and 30%, depending on your credit history.
- Determine Which Option Works for You: If you want new, upgraded equipment every few years, leasing might be the right option. You can renew your lease and get into something newer. Of course, most heavy-duty equipment is built to last, so if you want to purchase something you can use on jobs over time, consider the loan. After you finish making your monthly payments, that’s your equipment.
- Use the Section 179 Deduction: The IRS allows eligible businesses to deduct the full purchase price of the equipment in the first year.
Interested in financing equipment for your business?
Contact your local White Cap to learn how.
GreatAmerica is among the largest independent national commercial equipment finance companies in the U.S. and is dedicated to helping manufacturers, distributors, and dealers be more successful and keep their customers for a lifetime. A family-owned business, GreatAmerica was established in Cedar Rapids, Iowa in 1992 and today is organized into eight business units. It has a staff of over 600 employees with offices in Georgia, Minnesota, and Missouri. GreatAmerica also offers innovative non-financial business services to help their customers grow.