Having the proper tools and business equipment to operate effectively can make or break your profit margins. The actual equipment you need depends on the unique nature of your business and what you do. Assets can range from office equipment to delivery vehicles, heavy machinery, or even trademarks and copyrights. There’s a lot to take into account when choosing what tools you need to take your business to the next level, and then finding the best way to acquire those assets.
Determine what your business needs
Whether you’re a catering service or a construction company, you will need business equipment and assets to do your thing. If you have an operating agreement or similar document in place, it’s a good idea to take a look and walk through the process of your operation. This can help you determine exactly what you need to get the job done. There are three different types of assets to take into consideration.
Tangible assets are physical things that you can touch. Land, vehicles, computers, furniture, inventory, and machinery are all examples of tangible assets. Virtually all companies require some form of tangible business equipment to be capable of conducting business.
Non-physical assets with monetary value are considered intangible. These represent potential revenue. Internet domain names, licensing agreements, and permits are some intangible assets.
Intellectual property is a subset of intangible assets. These are rights held by the company that invented or produced a creative work. Trademarks, copyrights, and patents are examples of intellectual property.
Leasing vs. Buying Equipment
There are some situations where it makes sense for a company to purchase business equipment and other situations where leasing is the smarter move. There are benefits to both. The leasing vs. buying equipment discussion pertains primarily to tangible assets. However, you can also purchase or license intangible assets.
Advantages and Disadvantages of Buying Business Equipment
Owning your own business equipment has its advantages and disadvantages. If the equipment has long-term value and won’t need to be frequently updated or repaired, purchasing may be a good option. Owning your business equipment will also allow you to claim the assets for tax benefits. Depending on the equipment, it’s likely that you will pay less overall when buying equipment.
However, the large upfront costs of purchasing equipment can be a significant disadvantage depending on the amount of available capital or credit for the purchase. Purchasing necessary equipment on credit can also tie up valuable credit lines that you may need for other expenses. Another disadvantage is the potential for the equipment to become obsolete before you anticipate needing to purchase new equipment. High tech assets like computers and cell phones, for example, need to be updated on a regular basis to stay cutting edge and current.
Purchasing with Cash or Credit
It’s easy to assume cash and credit are just similar means to the same end, but there are important considerations when it comes to deciding how to purchase business equipment.
- Cash: This is the simplest way to purchase equipment. There is no paperwork and no interest, and you own the equipment outright. You will also have the peace of mind of knowing that you do not have additional outstanding debt. One problem is that you’re using valuable funds that can be used for unforeseen expenses and other emergency situations.
- Credit: Applying for credit takes a decent amount of time, and you will be responsible for paying interest. Credit can include a loan, credit card, or line of credit. Paying with credit may allow for more growth flexibility and additional cash on hand. Cash is often important for known expenses such as rent and payroll.
If you do not have cash on hand and need to find a credit resource that fits your business structure, there are options. Some of these include:
- Applying for an SBA Loan,
- Finding investors for your business, and
- Seeking grants in your industry.
When determining whether to purchase with cash or credit, you need to understand how the funds will impact future expenses and potential future expansion of your business.
Advantages and Disadvantages of Leasing Business Equipment
If your business equipment, such as computers or other electronics, will frequently need upgrades, take that into consideration when evaluating leasing vs. buying equipment. Leasing will allow you to obtain the latest business equipment with a lower upfront cost and commitment. Depending on your available finances, you may not be able to afford the cost of purchasing equipment outright.
If long-term savings are your priority, leasing may not make as much sense. Leasing your business equipment will require that you pay on an ongoing basis, which increases costs over time. Depending on the type of equipment, you may also have specific term length obligations and service packages. If the equipment goes unused for any length of time, this could be costly.
Types of Business Equipment Leases
There are two types of equipment leases that could fit your business model: operating leases and financial leases.
An operating lease allows a company to use the equipment for a set period of time without owning the equipment. The set time is usually shorter than the estimated economic life value of the equipment. When the lease term is complete, the lessor still has the ability to recoup any additional costs by reselling the equipment. Equipment obtained through an operating lease is counted as a rental expense, which does have some accounting advantages, including tax incentives.
The second type of business equipment lease is a financial lease. This is also called a capital lease. The structure of the lease is similar to an operating lease, but your company may choose to purchase the equipment at the end of the lease term. Another difference is that the lease itself needs to be listed as an asset for accounting purposes. Owning the equipment does mean that your company can claim the depreciation tax credit for the value of the asset and the interest expense. A financial lease also increases your business’s holdings and liabilities. Large companies are most likely to use the financial lease structure when leasing business equipment.
Is government surplus an option?
When a state or federal government agency has extra equipment, it’s either transferred to another government entity or sold to the public. Sales are held as online or in-person auctions. In some situations, deals may be negotiated. Here are some lists of places that may have some of the equipment you’re looking for:
- Military Surplus
- U.S. Marshals Service – Seized Asset Information
- U.S. Treasury – Seized Vehicles Sales
- U.S. Treasury – IRS
Items from these sales can include anything from computer and office equipment to vehicles, machinery, and even property. Government surplus assets are often a lot more affordable than ones you would purchase from a regular seller.
Deciding How to Buy Assets and Equipment for Your Business
There are a lot of things to take into consideration when purchasing equipment for your business. Many of the important parts revolve around the financial needs of your business. ZenBusiness helps businesses grow by providing accounting services, bookkeeping services, and more.
- Can I sell equipment to my own company?
You may sell business equipment to your own company, but be careful how and when. This could benefit your company by reducing acquisition costs and allowing you to take advantage of depreciation tax credits. But if you’re looking to transfer legal ownership of an asset or equipment to avoid paying debts, you are breaking the law. It’s important to keep track of the value of the assets at the time of the original purchase to determine the depreciation value. There are three questions that a court may ask if there is controversy over a sale of personal equipment:
Was the transfer made with intent to defeat creditors?
Was the debtor insolvent at the time of the transfer or made insolvent by the transfer?
Was the transfer without reasonably equivalent value?
As long as these areas are not in question, the sale is generally permissible.
- Is equipment an asset or expense?
The purchase of business equipment is not counted as an immediate expense. Instead, it’s spread over the life of the equipment as it depreciates. The equipment is generally considered a “capital” or “fixed” asset. These are generally assets purchased for long-term use that cannot be liquidated quickly.
- How do you transfer personal assets to a company?
It’s important to differentiate between a capital contribution to your company and selling assets. If you transfer assets as a capital contribution, it will give you personal equity in the company. If you sell your assets to the company in exchange for value, it will be treated as a standard business transaction and will not increase your stake in the company.
It’s important to keep a record of the sale. Some assets, such as vehicles or property, come with deeds or titles that must be transferred.
- Can I transfer my personal vehicle to my business?
You can sell or contribute your vehicle to your business, but it’s important that all changes in ownership are properly recorded and submitted to the relevant state DMV. Record the original purchase price, fair market value, and depreciation. State regulations may vary, but the IRS does not prohibit an owner from transferring their vehicle.