Machinery, vehicles, computers, and other essential items are some of the most important things that your company requires to keep your business operations running. In fact, they tend to be the most important components of your business, depending on your industry. In some cases, you need to get new equipment to expand your services or sometimes you may need to fix something that has broken down. Touching your working capital or withdrawing from company funds that are meant for other things might not be practical. In this case, an equipment financing loan is exactly what you need.
Investing in machinery is one of the most effective ways to increase the efficiency of your business. With the advent of technology, businesses that invest in machinery are typically those who succeed. This is especially true if you work in an industry that is labor intensive – machinery investment can help you greatly reduce your operating costs long into the future. That’s why it is vital that you are able to get the capital you need to help you fund the upfront costs of such investment.
Fortunately, many lenders offer equipment financing to help relieve the burden of the initial cost of purchasing machinery. This is a perfect example of how finance can greatly improve the running of your business – it offers you a low-cost way to invest in your business without exhausting your current capital. This page is dedicated to helping business owners understand the ins-and-outs of equipment financing and how it will be able to help improve operations. If you’re considering equipment financing for your business, read on.
There are other loan products such as short-term loans or term loans that allow you to borrow money for equipment purchase purposes. The main difference of equipment financing is that this loan product allows you to use that very equipment you’re purchasing as your collateral for the loan. It can be approved very quickly, in as fast as two days — you can get up to 100% of the value of the equipment you’re purchasing. This eliminates the need for you to present collateral to your lender. This also eliminates the need for so much paperwork and hassle.
Here’s an example: you own a moving business and one of your vans has stopped working. You have upcoming schedules with your clients and you’re now worried about not being able to deliver on time. Thankfully, you can get equipment financing to help you purchase a new van immediately – this allows you to resume operations right on time. Not only does this provide you with a new asset that adds value to your company, it also ensures that you don’t miss out on any business because you were underprepared.
Aside from the fact that you get up to 100% of the equipment value, you can pay back your loan for as long as the expected lifespan of that piece of equipment. For example, the lender assumes that this van you’re getting will be good as new for the next five years or so — your loan term can be as long as you expect your equipment to last. We will dig into this information deeper later on.
Interest rates for equipment financing range from 8-30%. The good thing about it is that you already know upfront what your monthly payments will be from the beginning until you finish paying off your loan. The downside? You will still be paying the same amount even if the quality of your equipment depreciates through time.
Are You Qualified to Get Equipment Financing?
If you browsed through other loan products on our page, you might have seen how many lenders look for stellar credit ratings when assessing if you’re eligible for their loans. While a good credit score will always give you better chances for approval, it is not necessarily required when it comes to equipment financing.
However, we have to be clear that it will matter too—your qualification and the amount of interest you have to pay can still be dependent on your credit score, the financial history of your business and the equipment’s value.
Remember, the equipment acts as the collateral for this loan product. In the event that you fail to pay back this loan, the lender can and will get that equipment from you. Your borrowing history is equally as important as the type of equipment you’re getting in the lender’s eyes. After all, that piece of equipment is as good as his until you have paid it off completely.
To give you an idea, most of our customers who were approved with equipment financing had annual revenues of more than $130,000, at least a two-year business history, and a credit score of about 630.
Equipment Financing Basics
Even if your business has been running for quite some time now, there are instances when your funds are just not enough finance new equipment that the company needs. Especially when the need for the equipment is unexpected. Surprises happen all the time in business, and that’s why you need to be as prepared as possible. Equipment financing allows you to react quickly to problems that arise with machinery in your company.
Thankfully, there are loan products, such as equipment financing, that can help you out. Lack of equipment should never be an excuse for closing down your business or giving up a good client. You don’t have to touch your company’s funds right now. There are lenders that can help you out. Our company will provide the necessary assistance during this process.
You must know that the term for payment for this type of loan depends on the type of equipment you are purchasing and its projected lifespan. For instance, a company car that will be used to get to and from work within the city versus a company truck intended for delivery purposes cross-country. These two vehicles have much different lifespans.
Note that there’s a difference between equipment financing and equipment leasing. When you’re financing a piece of equipment, you get to keep it under your name or your company’s name as soon as it is paid off. When you’re leasing it, you can only use it while you’re paying. Leasing is more practical if you are only looking for temporary equipment.
Equipment Financing: Practical or Impractical?
Now that you are close to deciding whether or not you should apply for equipment financing, it is best to be aware of the costs related to it. Whether it is practical or not is still highly dependent on your company’s situation and the equipment’s intended use.
To make you understand better, think of a $20,000 price tag on a piece of equipment. First of all, does your company have $20,000 cash to spend on this equipment? If so, will you have enough money left to fund other business needs after spending $20,000? Will this disrupt your cash flow at all? If not, then you can probably consider paying in cash.
On the other hand, if you choose equipment financing, you don’t have to spend $20,000 upfront. Yes, you will have to pay interest rates over time, but you can use that $20,000 to expand or improve other aspects of your business. Perhaps that $20,000 is meant to be used to purchase new tractors. If you are not using your ready cash for those tractors, you can have extra funding for marketing, more employees, or additional services. Good business owners use their cash for things that they can’t finance.
Before you apply for any form of finance you should ensure that you are prepared for your application. This includes a range of things, such as having all your documentation in order, as well as a business plan to show lenders that you understand how your equipment will be able to improve your business. Another aspect of application preparation that you should take seriously is making sure that your credit score is in order. You should always keep tabs on both your personal and business credit scores to make sure that there are no mistakes. In terms of equipment loan financing, the credit score that lenders look at will differ depending on how old your business is. If you’re a new business owner, you may find that the lender is much more interested in your personal credit score as it will be the best indicator of your responsibility with debt.
You should pull both your personal and business credit reports to make sure there is no misreporting. You’d be surprised at how much misreporting there is on credit scores, and it can seriously impact your ability to apply for loans. If you do find a mistake, contact the credit reporting bureau and show evidence of what is wrong with your report. If you they are still refusing to change your report, contact a credit repair company to act on your behalf – it’s worth the investment. If the lender wants to use your personal credit score, you should also pay down as much debt as possible. The amount of outstanding debt that you have on credit cards and other forms of finance will greatly impact your score. Paying down credit card balances is one of the best ways to improve your score quickly.
Who Provides Equipment Financing?
Equipment financing is one of the most common forms of small business loan. Businesses have been financing equipment for over a century. Expensive industry machinery saw a serious increases in prevalence during the mid-1800s – the industrial revolution brought the concept of increased efficiency by machine to the forefront. Because of this, commercial and consumer banks have been offering equipment financing for a very long time. Many business owners still head to commercial banks when they decide they need to finance a new piece of equipment for their company. Many of these commercial banks are able to offer extremely low interest rates. The only problem is that they normally require extensive documentation. Large institutions are very risk averse, especially after the financial crisis in 2008. This means that the application process can be extremely lengthy.
Because of how modern finance is changing, you can now also apply for equipment financing directly online. Many commercial banks offer these services, but so do a new range of online-only lenders that make the process much easier. Online lenders have higher interest rates, but they also have a much easier application process. You can upload all your documents directly to their platform – this means that you save valuable time that you can be using to work on other things in your business. In addition, online lenders are much quicker to make decisions regarding any financing – you can often get the capital you need in 24 hours. Traditional commercial banks sometimes take up to two or three weeks to get you the money you need. If you’re in a rush to get new equipment, online lenders may be the better choice for you!
Secure or Unsecured?
Most equipment financing is secured to the equipment that is being purchased by the business owner. As mentioned previously, if you fail to take control of your payments and make them on time, the lender will be able to seize your property. This creates a series of issues if you need the machinery to effectively run your business. The first solution is obvious: make sure that you make all your payments in full and on time. But this isn’t possible for everyone, especially if you hit a gap in cash flow. That’s why some business owners try and get an unsecured loan, that way the lender can’t seize the equipment should they default on the loan. Defaulting will still do considerable damage to your credit score, but it won’t result in your losing your property. The problem is that these unsecured loans are way more expensive due to the risk that the lender is taking on – you’ll find the interest rates are infinitely higher.
Another alternative is to open a line of credit when you take out a secured equipment loan. If you happen to not be able to meet your payment requirements, you can use your line of credit to pay off the equipment loan until your cash flow improves. This is one way that you can avoid paying high interest rates upfront and still not risk having your equipment repossessed.
Advantages of Equipment Financing
After reading the content on this page you probably have a good idea of the various benefits to using equipment financing in your business. We’ve created this section so you have a clear and concise presentation of what the advantages of equipment financing are. Below is a full list of the most prominent advantages:
- Affordable – Because equipment financing is secure, it tends to be more affordable than other forms of credit. Lenders offer good interest rates because they know they can repossess the equipment should you default on the loan.
- Accessible – Because the loan is secured against the equipment that you’re purchasing, it also tends to be more accessible to borrowers. Even if you have a poor credit history, lenders are more likely to give you equipment loans because it’s secured against such a hard asset.
- Growth – Investing in equipment is one of the best ways to help your business grow. It’s incredible how much extra revenue can result from having more efficient equipment. In fact, if you want to run a successful business, you will most likely need to use equipment financing at some stage. It’s almost unavoidable.
- Credit Building – If you have a limited or poor credit history, having an equipment loan is the perfect low cost financing that will help you build a credit history for the future. Because it’s accessible to those with limited histories, it really is a good stepping stone.
Disadvantages of Equipment Financing
Just because there are tons of great advantages to equipment financing, it doesn’t mean there aren’t plenty of drawbacks as well. You should consider the following disadvantages when weighing up whether or not it’s the right form of financing for you:
- Secured – While the fact that many equipment loans are secured may seem like a good thing to you, it can also have some drawbacks if you’re trying to avoid getting your equipment repossessed. If you’re worried about your ability to pay, and you also happen to need this equipment for the proper running of your business, having a secured loan is risky.
- Locked In – This may seem obvious but it is a real problem that creates many problems for some business owners. If you’re investing in machinery, you need to make sure that you have the right type of equipment – you may end up getting finance for something that isn’t as good or as efficient as you think. In addition, the equipment you purchase may break, which means that you will have to pay to have it fixed – this can be a serious issue if you’re still having to meet debt obligations.
What Not to Do
When it comes to attaining finance in your business, you have a lot of different choices. Lenders will try and push you in a particular direction with the aim of getting you the most suitable financial products, but businesses get creative with their financing nonetheless. There are no set rules in what you can use to fund equipment in your company, but there is one thing that you should try and avoid at all costs – high interest equipment financing.
Many small business owners make the mistake of purchasing equipment with high interest credit or loans. This is a big mistake – equipment is very easily planned for, so make sure that you use loans that are tied to the equipment itself – you don’t need to be paying extra money for equipment financing. For example, many business owners make the mistake of buying equipment with a line of credit or credit card – the interest rates on these lending products is way too high for an equipment purchase. When you are purchasing equipment, you are purchasing a hard asset that has plenty of inherent value, you should be taking advantage of this and getting a much lower interest rate. In addition, a traditional loan is much easier to plan payments for.
There are a few important things that you should remember if you’re thinking about getting equipment financing. Firstly, you need to make sure that you have a rainy-day fund that can cover the costs of repairing your equipment should it fail. If not, you need to make sure that you’re buying equipment that has an adequate warranty for the term of your loan. Having your equipment break down while still having to pay it off can be a serious problem. If you’re unable to produce goods, but still owe your lender money, this will not change – it can result in serious financial damage to your company.
In addition, you need to ensure to leave ample time to make the right decision when it comes to equipment financing. Rushing into any decision in finance is an easy way to do serious damage to your company. Lenders are looking for borrowers who don’t act diligently – they include hidden charges and fees to rack up the cost of your debt. If you’re unaware of these fees, but you sign an agreement, you’re still responsible for paying them. Make sure that you ask each lender for a full break down of costs – they should be able to provide you with the total cost of the loan you’re taking out. Comparing total costs is the best way to compare different loans, if you don’t include fees and charges then you’re not getting the true cost of the finance you’re receiving.
Lastly, make sure that the equipment you’re purchasing will have a positive impact on your business. You need to do a cost-benefit analysis to make sure you truly are getting the right equipment for your business. Investment in equipment has the potential to be a great improvement for your business, so make sure to do your research.
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