Strategic advice | August 2024 Equipment acquisition: The benefits of long-term thinking

When your company opened, its equipment needs may not have been sophisticated, but they were foundational. To get off the ground smoothly, you needed the essential machinery, hardware, and software delivered and installed in a fast, efficient, and coordinated manner.

As a result, in its early business lifecycle stage, your company may have taken a straightforward approach to equipment financing. You likely chose the funding method that met your immediate, practical needs with minimal downsides.

But as your company transitions into a growth or established stage, revisiting some of the options you initially passed over—and adjusting your approach to financing equipment acquisitions—can help your business achieve long-term success.

To learn about the nuances of funding options, here are some insights on building a long-term equipment acquisition strategy that can strengthen and grow your business.

Designing a long-term equipment acquisition strategy starts with two questions: Should you purchase or lease? And will you self-fund the transaction or use third-party financing?

The two decisions may be related. For example, you may have to weigh whether you can get better financing terms for a purchase as opposed to a lease, or vice versa. Or, they can be separate if owning the asset is critical to your company’s future.

The decision to self-fund or finance may also depend on your company’s history and cash flow. If a lean early stage saddled you with unfavorable financing terms but the transition to a growth stage has provided you with excess capital or credit, you might gravitate toward self-funding.

“If a growth or established stage business takes the long view on equipment acquisition, they might notice third-party financing options can be a much better fit,” says Scott Lackovitch, Managing Director and head of commercial originations at Truist.

Whether you select equipment finance or purchase, the best decision you can make for your company will be an informed one. Accomplishing that begins with contrasting the benefits provided by each method.

Here is a quick comparison of the advantages of purchasing and leasing.

Purchasing advantages

• Own the equipment
• Count machines and tech as assets that can increase enterprise value
• Decrease your lifetime equipment costs
• Utilize value depreciation for tax benefits
• Generate alternative funding through equipment resale

Leasing advantages

• Eliminate down payments and reduce upfront cash requirements
• Preserve working capital
• Upgrade, install, and maintain equipment with greater ease
• Deduct monthly or quarterly payments from taxes
• Enable faster equipment acquisition with expedited approval processes
• Accelerate your return on investment^{Disclosure 1}

Weigh these potential benefits with the individual circumstances of your business to see if purchasing or leasing is a better fit. But after choosing a method, you should note the specific advantages that drove you to select one category over the other. These will serve as the cornerstones for building your acquisition strategy.

If you decide to pursue third-party financing, you’ll need to choose between lines of credit, loans, and leases. The extra strategic groundwork it takes to choose a method can help you find the most advantageous approach.

For example, let’s say an established-stage healthcare provider needs to increase the inventory of MRI machines in its hospitals. MRI technology evolves quickly, making frequent upgrades a central equipment acquisition concern. This technology also requires reliable, fast installation and maintenance, which could literally be the difference between life and death for patients.

Those key considerations make the benefits of equipment lease financing stand out. Unlike purchases, leases can be more easily structured and readily negotiated to ensure each machine and service is delivered to spec. In addition, features common to virtually every form of equipment leasing—like expedited approval processes and low-to-no upfront payments—can help you get needed equipment as fast as possible.

You may think of a lease as something you set up directly with the seller, such as when you lease a car. But just as auto dealerships have financing arms, when you lease a large piece of equipment, you may have options regarding who provides the lease. A bank is one of those options.

About half of all medical equipment is leased, and banks account for 53% of equipment and software financing volume across all industries.^{Disclosure 2}

“Bank-owned leasing means you don’t have to work all the details out yourself—you’ve got a trusted partner to negotiate lease terms with a manufacturer from a position of strength,” says Lackovitch. “The same goes for independently vetting the quality of installation and maintenance crews or haggling over servicing costs. With a lease that bundles these aspects, that can all be taken care of so you don’t have to.”

Here are the most common benefits of choosing a lease for your equipment financing.

Tax advantages
One of the primary financial benefits may be the ability to write off lease payments as a business expense by deducting the monthly payments from your taxes.

Asset management
Leasing allows a trusted banking partner to capture key benchmarking details about your equipment and its maintenance that can help provide formal or informal asset management strategies.

Alternative funding sources
Capital leases enable you to own the equipment at the end of your term. This provides the benefits of leasing while delivering a balance sheet asset. You can then sell or lease your owned equipment to provide secure funding and improve your cash flow.

Mitigating labor shortages
In a fluctuating job market, you can structure leases with provisions that enable the fast, affordable addition of equipment. This strategy can mitigate the impact of labor shortages and allow for uninterrupted growth. 

At its best, a long-term equipment acquisition strategy creates a cycle of improvements that feed into one another. Preventing equipment obsolescence through smart acquisition leads to capital efficiency, accelerated return on investment, and balanced budgets with surpluses for hiring, marketing, and other functions.

“Once you’re out of the early stage, you’re in a position to use the flexibility of third-party equipment finance to coordinate efficiency across the whole company,” says Lackovitch. “And whether it’s equipment acquisitions or growing in new markets, the all-encompassing nature of Truist Business Lifecycle Advisory is built to help you do exactly that.”