Maintenance, repair, replacement, and purchasing costs are some of the major financial challenges that companies working with heavy equipment face regularly. It is possible to cover these expenses out of pocket, but the chances are high that it will have detrimental effects on your finances in the long run. Equipment financing is a concept that can be of great help, and this article will cover its basics to help you understand.
Define Heavy Equipment
Many times, heavy equipment is a word for the machines used in the construction industry. However, the term covers a broader variety of machinery and vehicles operated by qualified and licensed personnel. Such equipment includes tractors, street sweepers, backhoes, and tunnel boring machines.
Heavy Equipment Leases vs. Loans
Heavy equipment financing can be done in two ways: through loans or leases. The choice you make depends on whether you intend to buy the machine and own it or use it for an extended period. An equipment loan enables you to buy the equipment you require. Such loans have lower interest rates, but they cover a smaller portion of the total equipment purchase cost. You will be required to pay 15% of the cost of the machine as a down payment before you get a heavy equipment loan. The lender can give you between 3 and 7 years to pay back the loan.
Heavy equipment leases can be used to buy or rent the machine you need. This implies that you can get capital leases or operating leases. Capital leases are similar to heavy equipment loans because they are used to make a purchase. However, no down payment is required, and such funding covers 100% of the buying price. Operating leases are similar to capital leases, but there are a few variances. The lender gives you two years or less to pay back an operating lease. When the lease agreement comes to an end, you get three options: buying the equipment at market price, returning it, or renewing the lease.
Funding heavy equipment from your pocket is possible, but it has some severe effects on your finances. Therefore, it is wise to consider getting heavy equipment financing, as explained above. Contact KPI today to get more insight on how to manage your business better.