Equipment financing is a valuable tool for business owners. Before you choose the right option for your business, first you need to understand five common terms:

1. Loans and Leases

Equipment loans and equipment leases are two popular financing options for getting the equipment you need. They may look similar, but there are significant differences between the two. With a loan, the bank lends you money to purchase the equipment outright. You own it, and you’re responsible for maintenance and other related costs.

Leases operate differently. In a lease, the lender retains control over the equipment and allows you to use it in exchange for a monthly payment. The financing company is generally responsible for repairs and maintenance.

What’s the difference in cost between leasing and loans? Exact terms and interest rates vary by lender, but you usually pay more in the long run for a lease. However, monthly lease payments are comfortable and leases give you more flexibility for upgrading to new equipment frequently.

2. Deferred Payment

This is a type of flexible financing option that allows you to hold off on payments until later. Sometimes it’s advertised as “Buy now, pay later.” This option can be especially attractive for new businesses, since you may need time to start making profits so you can make payments comfortably on the equipment.

3. No Money Down

Equipment loans frequently require a down payment of 10% or 20%. Established companies may be able to qualify for this type of loan using money from savings, but new businesses may have a harder time. If a piece of machinery costs $100,000, down payments can eat up $10,000 or $20,000 of your valuable liquid capital. When lenders advertise “no money down” loans, they mean you can totally forget about the down payment! That way your capital goes towards your business instead.

4. Skip Payment

This option is excellent for companies with seasonal cash flow variations. Lawn care companies, for example, stay very busy during spring and fall but virtually freeze during wintertime. With skip-payment financing, they can put off payments during slow times without facing interest penalties.

5. Step Payment

Step-payment equipment financing requires you to make payments from the beginning, but early payments are much lower than normal. What you pay gradually increases as the months go by. This is another option to help businesses generate profits with new equipment before having to make larger payments.

Equipment financing can help you obtain the tools, machinery, equipment and systems needed for your company to run smoothly. It’s compatible with startups, small businesses and large companies looking to expand.