Opening a new small business is an exciting yet daunting adventure for many entrepreneurs. Typically fueled by the idea of opportunity and the adrenaline of ambition, small business owners may find that the paperwork and financial implications of opening their business is more than just a speed-bump on the road to opening day: it’s a journey that tests one’s perseverance and determination.
Indeed, one of the biggest financial decisions small business owners will face right off the bat is how they’ll be acquiring their new equipment. Whether you’re opening a mechanic shop, diner, bakery, or any other type of small business, you’ll need to stock your establishment with the proper equipment to pass code requirements and to perform the tasks needed for your business to be successful. There are two primary ways to purchase your equipment: leasing/financing or owning. With each comes a host of potential benefits and downfalls that can influence your business both in the short- and long-term.
Depending on your available funds, your needs, and your goals, choosing between leasing, financing and owning small business equipment can be a confusing task. Here are some tips to keep in mind when acquiring equipment for your small business:
Leasing or Financing
While the ideal situation involves a location stocked with new, state-of-the-art equipment, the reality is that many owners will be scratching their heads trying to tally the numbers to a figure that fits their budget. Many opt to lease or finance in order to furnish their new business, but what’s the real difference between leasing and financing in the first place?
- Leasing: The main difference between leasing and financing is that with leasing, you’re making payments on your equipment until the end of the lease term wherein you need to sign a new lease agreement or return the goods. Consider this like renting an apartment.
- Financing: With financing, you’re making payments on your equipment, and at the end of your payment term, you own that equipment outright. Every finance payment builds equity, and in the end, you own that equipment free and clear.
With either option, you’re opening yourself to a host of benefits – and let’s face it, many of us would not have the financial means to fully furnish our new business without these options anyway! You can choose your terms and pay over time, giving you a larger sum of working capital while paying off your equipment. In the end, you’ll own your equipment (if you financed) and have paid it off in an economical way. J.D. Rothberg, co-owner of the small restaurant chain Wild Eggs, says, “When it comes to kitchen equipment, knowing how to make informed purchases that are both cost-effective and long-standing can help retain your working capital while reducing headaches in the future.”
We’d probably all like to purchase our equipment in full right from the start, as then we don’t have to worry about continual payments over time. New businesses are especially susceptible to the swings of economical changes, and when traffic is slow, some may struggle to pay a monthly payment towards their equipment. Owning equipment takes out those payments over time, freeing up your finances for focusing on growing your business.
The downside is that when you choose to purchase your equipment outright, you’re putting yourself at a greater risk of loss. If your business should falter or fail quickly, then you must find a way to sell all of your equipment in order to close up shop. You’ve invested a ton of starting capital into your equipment, and this leaves many with a smaller working budget at one of the most sensitive times for business: the first few opening years.
New vs. Used Equipment
Another point to take into consideration when you decide to lease, finance or own equipment is the state of the equipment itself, as many businesses choose to opt for used equipment from the get-go.
For those who are refurbishing old establishments like restaurants, many pieces of equipment can be transferred from the old kitchen and into the new with little to no effort. While this poses its own risks with life expectancy of the unit, cleanliness, and reliability, it can be a good option for some minor pieces of equipment that can also shave money off of your budget.
The benefits to new equipment are numerous, as you’re likely to have less maintenance right off the bat and will hopefully get more usable life out of your units as opposed to purchasing used equipment. Many pieces of new equipment come with warranties as well. Keep in mind that units that directly affect products (refrigeration units and car lifts, for example) put higher-grossed items at risk than the cost of the unit itself. Chad Coulter of LouVino wine bar says, “I am not willing to risk $5,000 of product when it only costs $2,500 to get a new unit.”
All things considered…
A combination of leasing, financing and owning your equipment is likely the key to successfully furnishing your new business. Take into consideration what equipment is available in new and used forms as well as what types of loans are available to you, as these options will all differ from business to business (and owner to owner).