How to Finance Equipment for Your Business
In the broadest sense, an equipment is anything that provides non-human labor that performs a specific and unique function for a certain cause. For your business, all your equipment should help to keep things running smoothly.
No matter what the size of your business, there will come a point that you will need to upgrade, to add, or to replace equipment. It is during these times that a business owner would need to think of how to finance this.
How do you get financing for your business equipment?
Basically, there are two ways that you can get equipment for your business: through equipment leasing and equipment financing. The main difference between the two is you never really own the equipment in the former, while you buy ioutright in the latter.
How does equipment leasing work?
The process of leasing an equipment is just the same as renting an apartment or a car. For a monthly fee, you get to use the equipment until the end of the contract.
After that, you have the choice to get in another agreement to continue its use. Else, after the termination of the contract, you can buy the equipment for its fair market value.
What are the advantages and disadvantages of equipment leasing?
- You do not need a lot of money to get the equipment
Think of it as renting a house. Compared if you were to buy it, the difference is really huge. The same goes for your business equipment.
- It leaves you with a lot of cash on hand
If you are already strapped for cash, buying or loaning an equipment may not be a good idea. By leasing, you leave a lot for other bills like payroll and other inventory.
- It allows you to update technology
If your business is in a technology-related field, leasing instead of purchasing will save you a lot of money. There, cutting-edge technology can lower production costs or help you rise above your competition.
- It can be more expensive in the long run
In a quickly expanding business, it may make more sense to buy than to just rent. If you are going to use the equipment for a long time, the monthly fee you pay for leasing can add up to a substantial sum.
- You may be deemed liable if the equipment breaks down
Because the equipment is in your possession, you will be responsible for any machinery failures that can happen. In that event, you may be forced to buy it outright for its current value.
How does equipment financing work?
In equipment financing, the amount you borrow will depend on the kind of equipment you will purchase and whether it is used or brand new. The interest rate I usually fixed, ranging from 8% to 30%.
This kind of loan is inherently secured, with the equipment itself serving as the collateral. Thus, if you fail to pay back your creditor until the life of your loan, they will repossess the equipment.
What are the ways that you can finance equipment?
- Small business line of credit
Although designed for short-term loans, small business line of credit is the way to go if you want your equipment as soon as possible. It is relatively easy to acquire this kind of loan in terms of credit score.
It basically works like your average credit card. If you have an outstanding credit score, you can get as much as $1 million in your line of credit. However, there is one major setback. The interest rates can easily rack up to 30%. Thus, it is best for low-cost equipment you can afford to pay back immediately.
- Equipment loans
If you are a relatively new business looking to expand operations, check out equipment loans. The annual interest rate ranges from 8% to 30%, while the life of the loan can be anywhere from three years to ten years.
You can submit your loan application to online creditors or to traditional banks, depending on how soon you need the funding. With the former, you can get the results as soon as 24 hours after submission, while it can take days or weeks with the latter.
- Small Business Administration CDC/504 Loans
If your business is B-eligible, you can enjoy low interest rates coupled with favorable repayment terms. The interest rate here is determined by the market rate for U.S. Treasury bills, which currently is at 4.25%.
A 504 lets you borrow up to $5.5 million, and loan term of up to 20 years. The downside, however, is that the competing the different stages of the application can take up to eight weeks. Moreover, you will have to pay upfront 3% of the total loan amount.
Term loans are basically equipment loans, but with more stringent requirements. Thus, it is meant for established businesses with a consistent revenue.
Here, you can borrow up to $1 million with possible lower interest rates and origination fee. The process is very efficient as well, with you receiving the funds in just a few days.
- Business credit card
Essentially similar to small business line of credit, there is high annual percentage rate (APR). Their differences, however, are the rewards program and cashback as well as the annual fee.
Because the credit limit is very low with the maximum at 100 thousand dollars, it is best for small equipment purchases and other minimal expenses.
What are the advantages and disadvantages of equipment financing?
- You get to own the equipment
If you were to use the purchased equipment for a long time, you get to save a lot by not leasing.
- There are tax incentives
Equipment financing amounting to up to 500 thousand dollars is tax deductible, leaving you with a lot more to pay off your debt.
- You may be left with obsolete technology
In fields where equipment easily becomes obsolete, you may end up with the bill for something you do not intend to use anymore.
When it comes to deciding how to fund equipment for your business, look at the nature of your business as well as how often its needs changes. Through those simple inspections, you can decide what the right options is for you.
Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state.