Equipment is the backbone of many small businesses. The decision to replace or repair existing machinery can have many factors to consider. Business owners may not have the working capital on hand to make necessary upgrades or want to use their extra funds for other important business expenses. The equipment, labor, and operating costs are all considerations when planning for an equipment replacement or repair.
There is a fine line that business owners must think about when deciding whether to replace or repair their equipment because making the wrong choice can have serious financial consequences that may not have originally been considered. Small businesses operate with narrower margins and tighter budgets, so poor investments are of even graver concern.
That’s why it’s necessary for businesses to take a hard look at what exactly they stand to gain from each option and understand when equipment leasing or financing makes sense. Here’s our checklist to consider when deciding whether to repair or replace your business equipment:
Repair vs. Replace Assets
Depreciating asset value vs. cost of repair
Just like a car, your equipment depreciates value as time goes on. The older a piece of equipment is, the less value it holds – depending on the equipment and industry. To best determine if equipment replacement is your best course of action, you should compare the piece of equipment’s current value and the total cost of the repair. Do some research on the depreciation value of your equipment and how it compares to the repair costs. Will the equipment need additional repairs down the road? Is there an expected lifespan for the equipment? Is the new version more expensive? Once you have a grasp on the equipment’s value, you can decide based on the value of the equipment.
Cost of repair vs. cost of replacement
Right off the bat, owners should be mindful of the upfront costs of each measure. If the newest model of equipment is $80,000, but a simple repair on a current model is just a few thousand dollars, then the decision to opt for repairing may be simple. However, it is often not always that simple. There are several factors that go into determining the costs and potential benefits of new machinery – if it’s too pricey, then it could be better to settle for a repair.
Installation and upfront costs can also increase overall costs for either solution. Does the equipment require a vendor to install? Is it feasible to source replacement parts? While a simple replacement part may cost a few thousand dollars, the labor of the specialized technician to install could exceed your budget.
Age of equipment
How old is your equipment? In a lot of industries, older equipment becomes obsolete as technology improves. Different types of equipment have different expected life cycles and performance can be affected as the equipment ages. If the equipment is outdated and difficult to find replacement parts for, it might be more cost-effective to invest in newer technology. Knowing the typical lifespan of your piece of equipment and how it compares to the newer version will help you determine the cost benefit to repairing or replacing. The overall age of your equipment can impact its resale value or even the ability to repair it.
Productivity and downtime
The equipment itself isn’t your only consideration when examining whether to repair or replace. If the equipment in question is a vital part of your business, consider what projects and revenue will need to be put on hold while the equipment is out of order. Long delays in shipping parts or finding a replacement can slow down crucial aspects of your business. As such, business may slow down or projects can be halted completely, which will drain capital from the company and be counterintuitive to the original goal of making a smart financial move. The overall impacts of downtime can drive up overall business costs if you’re losing money while waiting for a solution. It could be effective to settle for a short-term solution now to avoid further equipment downtime and then decide on a full replacement.
Energy efficiency
Consider the energy efficiency of your current equipment and how it compares to newer models. Older washing machines, for instance, are typically inefficient and use a lot more energy than newer models, which drives up your energy costs. A newer and more energy efficient model can save you a lot on your electricity bill. Investing in more energy efficient technology helps reduce environmental pollutants and reduces the carbon footprint of your business.
Technological advancements
Newer is often better, as far as technological improvements in equipment go. Consider the advancements in technology for the equipment you need to replace and how it compares to your current equipment. Can the new version work more efficiently and increase productivity? Does it have features that will help your production line? Modern technology can help enhance your competitiveness and make it easier to get the job done.
Tax implications
Investigate any potential tax benefits or deductions associated with repairing or replacing business equipment. Tax incentives might make one option more attractive than the other. A popular business tax deduction is the Section 179, which allows businesses to claim the full purchase price of equipment in a single tax year. This can be a significant tax break for small business owners and makes it feasible for businesses to purchase big-ticket equipment items when they normally wouldn’t be able to. Section 179 and other tax deductions usually apply to leased equipment – which helps spread out the business budget even more.
Equipment in your future business plan
Though immediate needs should be addressed, it’s still important that future business plans revolve around long-term financial goals. That’s because simply settling for the quickest and cheapest option is not a sustainable strategy. Eventually, equipment will have to be replaced regardless, and making the right move the first time can save untold amounts of money and time.
For example, many construction projects are better served by specific machinery. And in the future, businesses may have to upgrade to the most advanced models to perform the most basic tasks at hand, or else the work will be contracted out to another company that does have adequate equipment. Having the right equipment for the job puts your business in a more desirable position than your competitors.
Availability of equipment parts
For some old equipment models, manufacturers may not even make the replacement part you need anymore. It’s worth researching the availability of replacement parts and their warranties before committing to repairing equipment. It’s a good idea to understand how difficult it is to source needed parts and how easy it is to find someone who can complete the repair. This can be a deciding factor in repairing or replacing your equipment.
When to repair business equipment
Now that you’ve considered all the outlined factors, when is it a good idea to repair equipment over replacement? If your equipment has readily available parts, doesn’t require much downtime to repair, is a reasonable cost, and still has a long lifespan, then repairing your equipment is likely your best bet. Equipment repair can be cost-effective, but sometimes even that is out of your budget as a business owner. Short-term loans can help you cover gaps in working capital to keep your equipment up and running, as well as your business.
When to replace business equipment
Major equipment decisions can be made more easily when all expenses and expectations are thoroughly considered. Outdated equipment that can’t easily be repaired can be replaced with newer models that’s more energy efficient and better equipped to serve your business. Alternatively, maybe the tax benefits of purchasing a new version outweigh the cost of repair. If you’re looking to purchase new equipment rather than repair your old equipment, there are some other factors you’ll need to consider:
- How soon do I need the new equipment?
- Do I have the cash on hand to purchase it?
- If I don’t have the cash to make a purchase, what are my options?
National Funding is a great solution for the third question. We offer customized equipment leasing and financing solutions for business owners who need upgraded equipment but don’t have the cash to support a purchase. In this case, you can opt for financing to help you meet your goals.
Opt for financing
If upgrading your equipment is your best bet, but you don’t have the cash on hand for it, use an alternative lender to help. Equipment leasing and financing allows small businesses to access the funds they need to move forward on ambitious plans. Different than a traditional bank loan, leasing and financing are tailored to an individual business’ needs. National Funding offers flexible, fast equipment leasing and financing options to suit virtually any business need. This gives you the best of both worlds: new equipment to keep your business running without sacrificing your cash flow.
