Buying Equipment

Plan to buy business equipment? It's important that you know your option in financing so that they can be properly reflected in the business plan. Many business plan writers will incorrectly place all equipment being bought in start-up expenses. This is wrong for two reasons.

First, these are technically expenses; these are assets that can be depreciated over time. So placing these in the expenses column will incorrectly impact the expenses to open and the return on assets and depreciation columns of the financial projections of the business plan.

Second, many times it's not wise to place all equipment in the start-up expenses as assets or expenses. So where would they go? Leased equipment! Instead of needing the large capital expenses right up front and in turn the higher cash balances, the company may choose to lease the equipment over a fixed term and place the expense for this equipment as a line item in the operating expenses in the incomes statement.

Whether you choose either way there is another consideration on buying equipment for a business. New or used?

Generally, newer equipment comes with a longer warranty than used. However, the premium of new equipment offsets this. Used equipment is usually easy to find as 80% of small businesses fail, so finding the fallout of one of these businesses is rarely difficult to do. Used equipment can provide a good savings in the lean bootstrapping period of the business while new equipment may be higher valued by a bank for collateral purposes. Generally leasing is only available on new equipment. With these many considerations, a good business plan writer will help you see which way makes the most sense with the consideration on cash on hand, assets to fund, and interest rates of current leases.

Have questions? Give us a call at 877-453-2011 for a further discussion on best practices in equipment funding.