A significant percentage of business ventures depend on equipment for effective operations to keep running. However, business equipment or machinery can prove to be costly. The high costs are not the only issues when purchasing new equipment. Business equipment tends to call for routine maintenance, which can significantly raise business costs in a short time.
Lenders understand how burdening funding business equipment can be, and that is why they provide various avenues for equipment financing for businesses.
What Does Equipment Financing Mean?
Equipment financing generally means ways or methods business owners can take advantage of to reduce the upfront financial burden of purchasing or replacing business equipment or machinery at the time of need. Equipment repair financing helps business owners take care of equipment repairs.
Equipment financing is only acquired for business-related equipment needs, not any other use.
Business owners can acquire equipment financing from traditional banks, online lenders, financial institutions, and different government loan schemes.
Equipment financing comes with fixed rates; therefore, business owners repay the same amount throughout the loan term.
Why Should Small Business Owners Consider Equipment Financing?
Equipment financing allows business owners to spread the costs over a longer period while making the payments manageable and affordable. As the installments are staggered over several months or years, a business owner is left with the funds needed to manage healthy cash flow. As a result, the focus is directed toward running the business.
Financing business equipment gives business owners an opportunity to take advantage of other lines of credit. Since this kind of financing is predictable based on how monthly payments are made, business owners can get other kinds of business finances even with it. For example, they can get the required equipment and still take a business loan to cater to a different business need like marketing.
Equipment financing is a way to enhance flexibility and scalability for business growth. If a business owner can finance specific equipment and their business starts to grow, they can get a more flexible way to obtain other items faster without a huge cash outlay.
Because the payments for equipment financing are fixed, business owners can use that to hedge against inflation. The revenue returns from the equipment can keep increasing with decreased net cost, particularly where the payments are adjusted or adapted for future inflation.
Equipment Financing Options
Business owners considering equipment financing have two primary options to choose from- equipment loans and equipment leasing.
An equipment loan is the kind of equipment financing in which a financing company or lender lends a business owner money to buy business equipment.
On the other hand, equipment leasing is the kind of equipment financing whereby a financing company or lender allows a business owner to rent out business equipment for some time at a flat rate.
An equipment loan allows a business owner to own equipment that would otherwise have been too expensive to purchase after the loan is fully repaid. However, with leasing, business owners do not get to own the rented equipment even after the repayment.
Business owners can take out equipment loans for as little as a year or even ten years.
Equipment loans are generally good options for business owners with a strong cash flow or those who want to use the equipment for extended periods or several years. In addition, those who are confident that the equipment will still be useful and retain its value over time can also opt for equipment loans.
Equipment loans can be used to purchase second-hand business equipment. That way, business owners save a substantial amount of money they would have used to purchase brand new equipment.
Equipment leasing is a good option for business owners who think that a piece of equipment or machinery risks becoming obsolete in the course of the loan term.
Leasing is generally a better option where new equipment models, technologies, and regulations are introduced regularly. Business owners only use the equipment over its practical period in business.
Leasing takes care of costs associated with installation or shipping. That way, equipment leases can prove to be more tax-efficient than buying equipment outrightly.
With a lease to own, a lender can allow a business owner to purchase the equipment for Fair Market Value or once a predetermined period ends.
Equipment loans and leases are an excellent way for small business owners to build credit while preserving cash.
Considerations for Equipment Financing
Lenders or financing companies will analyze different metrics before providing equipment financing;
Credit Score
Some lenders like traditional banks and government-funded financial institutions will usually require borrowers to have a good credit score. Otherwise, they do not qualify. However, business owners who have poor credit can always choose other options like online lenders, which are usually more accommodating.
Time of Operation
It is common to find lenders who want to see how long a business has been in operation before they can provide equipment financing. Usually, they will require at least six months. A shorter period of operation presents a greater risk for a lender.
Business Plan
Lenders and financing companies will want to see a business owner’s business plan and proposal for upcoming growth. This requirement also requires business owners to detail the role the equipment to be funded will play in contributing to the business’s growth.
Down Payment
Small business owners may be required to put down a down payment before obtaining equipment financing. Start-ups and those with bad credit should expect a higher amount.
Small business owners who can comfortably pay a down payment can opt for equipment loans, while their counterparts who do not have the money can opt to lease.
Documentation
Lenders may require business owners who settle on equipment financing to provide them with documentation such as the business’s license, bank account statements, tax returns, credit score, legal documents, the quotation of the equipment to be purchased e.t.c
Interest Rates and Charges
These will vary contingent on how much a business owner is borrowing, their industry of operation, the value the equipment will have by the end of the loan term, and whether they are borrowing to obtain new or used equipment.
Borrowers with bad credit or those borrowing from platforms that offer funds generally faster and with less stringent measures like online lenders usually pay higher rates and interest charges.
Equipment leases tend to have relatively cheaper monthly payments than equipment loans. Still, they may end up being more expensive in the long run because of higher interest charges.
Equipment financing is always secured against the equipment to be obtained or acquired, making it a cheaper financing option for businesses. Since the equipment serves as collateral, lenders can repossess it in case of a payment default.
Final Thoughts
The bottom line is that equipment and machinery are vital assets for most businesses. They handle operations and can cause a business to stagnate or grow significantly. However, obtaining business equipment or taking care of some repairs can be expensive, but equipment financing saves the day.
Small business owners can apply for equipment loans or leases from lenders or financing companies. However, they must analyze the pros and cons presented by each option and compare lenders to settle on what will work better for them now and in the future.
