Every small business needs equipment to operate, whether it’s machinery, computers, printers, office furniture, or vehicles. If you have been thinking about purchasing or upgrading your equipment, it’s important to understand that there is a lot at stake when it comes to making the right choices, especially if there are big-ticket items on your list. Here are a few things to consider before buying or leasing new equipment for your small business:
Evaluate Your Business Objectives
When it comes to buying business equipment, it pays to know exactly what you need and why you need it. Take the time to develop clear and focused objectives. Do you need new machinery to improve efficiency, production, and/or the quality of your product? Is your investment designed to increase productivity and/or profits? Will the new equipment make you more competitive in the marketplace? Can you upgrade instead of buying new equipment and still get better performance?
The next step is to identify the essential pieces of equipment that will help you meet your goals. Focus on the “must haves”, and make a separate list of the items you would like to have. Every purchase needs to add value to your business, so invest capital in what is essential before moving on to your “wish list”.
Be sure to consider items like postage meters and large-scale copiers that may offer convenience, but can be outsourced to reduce your capital investment. Including your equipment needs in your business plan will allow you to budget for future purchases or upgrades, and revise the list as your business grows.
Consider the Consequences
The reason you are buying equipment may be to increase productivity, lower costs, and ultimately to increase your profitability. However, an investment in one area can have implications for other aspects of your business. It is important to look at the big picture and take into account the possible consequences of your purchase decisions.
For example, buying a new piece of manufacturing equipment could mean you no longer need as many workers. Reassigning or letting go staff could affect company morale and have unanticipated financial implications. If the equipment is brand new or has new features or technology, you can assume there will be a learning curve for employees. This may result in a slowdown in productivity while they get up to speed on operating the equipment. It’s important to budget time and financial resources for training and to cover the resulting downtime. Also, keep in mind that over-investing in equipment could cause short-term cash flow issues.
Investigate Used Equipment
If you are working with a limited budget, you may be able to save money by purchasing used equipment. Whether you’re looking for office furniture, computers, or peripherals such as printers and copiers, used models often can be found for a fraction of the cost of new equipment.
Consider things like the type of equipment you’re buying, the length of time you plan to use it, and how cutting-edge it needs to be. The more essential a piece of equipment is to your business operations, the more cautious you should be about purchasing it used. If you’re looking at used equipment that is still under warranty, make sure the warranty is transferable. Many warranties are only good as long as the original owner is in possession of the item. When searching for deals on used items, explore options such as auctions, liquidation sales, garage sales, and reputable online sites.
Don’t Sacrifice Quality for Price
While price is always important in deciding what equipment to purchase, you will also need to factor quality and value into the equation. Getting the lowest price on a piece of equipment can end up costing you in the long run if it frequently breaks down or doesn’t serve your operational needs adequately.
Carefully assess the long-term value of each piece of equipment and ensure you are investing in quality items that will meet your needs now and over time. For example, offices that rely heavily on computers should stick to well-established brands and avoid lesser quality PCs and monitors. When you find a deal on something you need, research the product thoroughly. You can find reviews on websites like Consumer Reports and many retail sites where customers can provide feedback.
Financing Your Equipment
Depending on your situation, there are several options to consider when it comes to financing business equipment. Purchasing equipment may be a good option for established businesses or for equipment that has a long lifespan, while leasing or renting might make more sense for business owners who have limited capital or need equipment that must be upgraded every few years.
Purchasing: The benefits of ownership and tax breaks like Section 179, which makes purchasing equipment more affordable by allowing a deduction of up to $500,000 a year in qualifying purchases, make buying equipment appealing for many small businesses. However, high initial costs mean this is not a viable option for everyone. Keep in mind that equipment maintenance and repairs, along with decreasing value over time, can add to the cost.
Leasing: There are a number of advantages to leasing business equipment. It allows businesses to acquire what they need with a minimum initial expenditure. Lease payments can usually be deducted as business expenses on your tax return, reducing the net cost of your lease. If you rely on high-tech equipment that quickly becomes obsolete, you have the flexibility to upgrade easily when your lease expires. However, leasing an item may be more expensive in the long run than purchasing it. For example, a 3-year lease on a computer worth $4,000, at a standard rate of $40/month per $1,000, will cost you a total of $5,760. If you had bought it outright, you would have paid only $4,000.
Renting: This can be a good option for equipment that quickly becomes obsolete or is needed for a specific project. Rented equipment is not considered a fixed asset, so you can quickly exchange or return it with minimal cost.
If you find a great deal on new equipment but don’t have the funds to pay for it, working capital funding can help cover the cost without impacting your current cash flow. Summit Financial Resources offers working capital loans for small to medium-sized businesses that involve using your accounts receivable and other assets as collateral. We can mix and match from a variety of product options to suit your needs, including invoice factoring, asset-based lending, inventory lending, and equipment financing.
Purchasing equipment for your small business is a complex process. The choices you make today can affect your short, medium, and long-term success, so it is critical to assess each purchase carefully before investing your hard-earned money.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.