Let’s face it, business finance is full of jargon. If you operate a machine shop you likely have a lot of skills in milling, cutting, and working with metal. Your focus is not on banking. So, understanding the distinctions between leasing, hire purchase and asset refinancing is not something that you have sent a lot of time thinking about.
Asset finance is the broad category that all of the above options for CNC machine financing fall into. When you are looking at high-value capital purchases – and CNC machines fall into that category – you want to find the best rate for the purchase, and the lender wants to be confident, for their part, that they will get their money back.
Asset financing has two sides. Firstly, you’re looking for CNC machine financing in order to get equipment for your business. You need that CNC machine so that you can take on more jobs and you might lease, lease-to-buy, or get a loan, to acquire that machine. The other side of the business is that you already have some assets, and you might use asset refinancing to get working capital to cover the costs of a future loan.
Equipment leasing is a form of CNC machine financing where you pay a monthly fee for your equipment. Some leasing is short-term, and you hand the equipment back at the end of it. This is good for a small project or a low-risk pilot. Some leases allow you to buy the piece at the end of the project, although this is not seen as often with such high-value items as it is in the consumer market, where “rent to buy” is common for household appliances.
Equipment Financing Experts
Leasing has some accounting considerations that loans and buying outright do not. When you lease something, the cost of the equipment is an operating cost, so it will be written off against gross profit. With owned equipment there is the option to write the equipment onto your balance sheet as an asset instead.
Long term leasing can leave you spending thousands more than the cost of the original purchase. Hire purchase is still more expensive than buying outright up-front, or on a loan, but is a good option for companies that struggle to access CNC financing outright. Financing, on the other hand, tends to have a lower interest rate which makes it appealing if you are in a position to borrow that amount of money. Buying a used piece of equipment is often a safer bet because used equipment does not depreciate as quickly as new equipment. CNC equipment loses a lot of value once it has left the factory and been used for its first job, so recouping the costs of a new purchase can be difficult even after a few months of ownership.
Remember that if you have a loan secured on a piece of equipment, you cannot take out a second loan on that equipment because the original lender has a claim to it. This means that your options for asset refinancing will be limited. Think carefully before you tie up a huge amount of money in loan repayments, and make sure that the machine will pay for itself in terms of the type of work, and order volume, that it will allow you to take on. Don’t be shy about talking to a financial advisor, and shopping around to get the best deal.