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Vendor Financing for Equipment Purchases

© Rawpixelimages | Dreamstime.com - <a href="https://www.dreamstime.com/stock-photo-finance-money-debt-credit-balance-concept-image70985523#res2965056">Finance Money Debt Credit Balance Concept Photo</a>If you need new equipment, whether large or small, determine whether you can afford it.

Not buying equipment can cost you dearly in lost productivity.

However, you may need some help to swing the purchase, and vendors are often willing to provide the financing to close the deal.

Understand how vendor financing works and whether it makes sense for you.

Types of equipment financing

You can finance the acquisition of equipment as you would any purchase. You can, for example, charge the payment to a credit card and pay it off over time at the speed that you can afford. If you have a line of credit, you can apply the funds toward needed equipment.

You can also obtain third-party financing (“equipment financing”), with the equipment as collateral for the loan. Typically, these loans close within a couple of days. Interest rates vary greatly. For example, Fundera’s rates range from 8% to 30%. NerdWallet has a list of some firms offering equipment financing, which is broken down into financing under and over $50,000.

You may also be able to arrange financing directly from the vendor selling the equipment to you. Often this may be the best option because the vendor is motivated to close the sale.

There may be special financing arrangements by certain vendors. For example, if you want to provide new HP notebooks to your staff but don’t have the funds on hand to do this, consider a special financing option offered by HP.  With HP’s Premium Upgrade Program, you pay a flat monthly charge per notebook; the amount ranges from $45 per month to $77 per month, depending on the type of notebook. Using this program entitles you to a new notebook every two years, including free setup and migration, coverage for accidental damage, and virus protection. This financing arrangement is a 24-month installment loan with 0% APR. The monthly payment is charged to your business credit card. While this is still a fairly new program, HP does plan to extend this financing option to their larger lineup of business laptops in the near future.

Impact of equipment financing on tax breaks

You can write off the cost of equipment purchases using a variety of tax rules, regardless of whether you finance the purchase in whole or in part:

  • Section 179 (first-year expensing). You can deduct the cost of these purchases in 2017 up to $510,000, as long as you’re profitable.
  • Bonus depreciation. You can also deduct 50% of new (not pre-owned) equipment, regardless of profitability.
  • Regular depreciation. The amount you can claim, which is based on percentages fixed by law, depends on the type of property involved.
  • De minimis safe harbor. If you opt not to treat the equipment as an asset on your balance sheet, you can deduct up to $2,500 per item or invoice (larger firms with audited financial statements have a $5,000 per item or invoice limit).

Interest deduction. If interest is charged on the financing arrangement you use to buy equipment, you can deduct it as a business expense. There is no dollar limit or other rules the come into play. The timing for the deduction depends on your method of accounting (cash or accrual).

Final thought

When you need to buy new equipment, it’s great to pay cash and avoid interest costs and complications. But don’t let the fact that you don’t have cash on hand deter you from acquiring the equipment you need. Talk with the vendor to see if some payment terms can be arranged. Talk to your CPA or other financial adviser to make sure that the terms are acceptable for your business.

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