Why Use Equipment Financing?

Every business uses some kind of equipment in its daily operations- from basic technology devices such as cell phones and laptops to more specialized machinery such as tractors, diagnostics machines, or manufacturing equipment. As you can imagine, industrial equipment and machines can be costly, and aspiring entrepreneurs rarely have that type of budget when first starting. Even established businesses might not have the funds to replace an X-ray machine or delivery truck when it breaks down. That is where business equipment financing comes in.

Here are the reasons why your business should use financing equipment

Whether you need to buy computers for a growing team or invest in vehicles or specialized machinery, you will need to consider how you will pay for that equipment. Business equipment financing can help you rapidly obtain working capital to purchase the items you need for your business. You will be able to manage your cash flow seamlessly, as this loan will enable you to spread out your debt payments over a long period. Here is an overview of some of the reasons why your business should consider equipment financing.

It can increase your working capital

One clear advantage of equipment financing is the increase in working capital accessible when a business chooses to use equipment financing instead of large up-front equipment purchases. Almost every company experiences cash flow shortages at some point, or another and equipment financing offers an option to free working capital for other expenses. When a company utilizes its working capital to make equipment purchases, the cash flow available takes a big hit, leaving many companies short. By making excessive use of equipment financing instead, business owners can use their working capital to fund other operating expenses.

Equipment financing you keep up-to-date with the best equipment

Another reason why you should use equipment financing is that it allows businesses to always take advantage of new technology by providing them the opportunity to acquire the most effective and efficient tools without worrying about the up-front cost. One restriction that prevents many businesses from attaining the equipment essential for the job is cost-new, state-of-the equipment is not inexpensive, and not all business owners can manage the newest equipment. This is where equipment financing comes in as it offers business owners the option to attain the tools required without the blow to working capital.

Equipment financing have tax benefits

Another advantage of equipment financing is the tax benefit. Wise business owners know how to use tax breaks to their advantage, and it is essential to build strong relationships with tax professionals to capitalize on all of the possible benefits. With equipment financing, the borrowing business generally will make payments to the lender or bank over the agreed-upon terms. With every payment, there is interest paid. With most equipment financing terms, the interest paid on the financing payments can be written off as tax-deductible.

Equipment financing can free up other lines of credit

Another advantage of utilizing equipment financing is that it frees up other business lines of credit. Rather than using a business term loan to apply for funds that will be used for new equipment purchases, business owners that use equipment financing for their equipment expenses will still have other credit lines open. For instance, if a business wants to buy a new piece of machinery; however, they do not have the money available, they could apply for a business term loan and receive a large sum of funds from a lender, some of the money they could use to buy the new piece of machinery.

Nevertheless, in this case, the borrowing business will spend a large amount of their business term loan on their equipment purchase, resulting in a working capital shortage. Instead, by applying for an equipment financing to fund the purchase for the large piece of machinery, if the company runs into a working capital inadequacy, they will still have the option to seek a business term loan later. Equipment financing also utilizes the equipment itself as collateral to secure the loan, so any other collateral that a borrowing business can provide can be used to secure additional financial products.

Get 100-percent financing with no down payment

Unlike most traditional lenders’ requirements, you might be able to arrange 100% financing of equipment without any down payment. This is key provided cash flow is a concern to your business.

It has a simple application process

Typically there is one difference when it comes to applying for equipment financing- the size of the equipment purchase. Applying for equipment loan for equipment costs up to $200,000 is very fast and easy, and the whole process- from application to closing- can often be sophisticated within 24 hours.

Costs under $200,000 are regarded as ‘small ticket’ equipment purchases. The application procedure is driven by the type and value of the equipment and the borrowing business’s credit quality. If a business has strong credit, the business has been in good standing for a long time, and the equipment being funded will hold its value, borrowers can expect a very fast application process. For equipment that costs over $200,000 (also known as a big-ticket) items, the process is a little sophisticated. For these larger equipment expenses, the lender will generally require to collect more information about the business and the particular kind of equipment, and the process can take up to one week or two.

Manage risk

Equipment financing can assist you in mitigating the uncertainty of investing in a capital asset your business requires until it attains the desired return, saves costs, increases efficiency, and meets other business objectives.

Hedge against inflation

Equipment financing might hedge inflation risk since instead of paying the total cost of equipment upfront, or with a massive down payment in today’s dollars, the stream of payments delays your outlay of funds. Besides, either a lease or loan can lock in the rates that exist on the date of closing. In simple words, the finance company absorbs your payments’ devaluation over time because of inflation and other financial risks.

Outsource asset management

Most financing companies provide asset management services that can track equipment status, know when to upgrade or update it, and offer services relating to the use, installation, de-installation, maintenance, and disposal of the equipment. 

Obtain the convenience of service and product bundling

Certain financial products enable customers to finance the entire cost of equipment, including up-front maintenance, installation, software, and training charges, thus packaging systems and ancillary services and products into a single, easy-to-manage solution.

Get no-hassle equipment disposal

Equipment management by a third party, like an equipment financing company, should promote a business’s ability to focus on its basic operations. In the event of computers and other technology devices, the companies might also agree to dispose of equipment. This service can prevent the borrower from incurring legal penalties for disposing of such assets improperly because disposal is usually regulated by federal, local, and state governments.

Buy now vs. later

Instead of waiting for several months or years to buy the assets you need, equipment financing helps you purchase them now- which means you can use them to increase capacity, boost profitability, and drive revenues.

Increase competitive advantage

The equipment you buy can be used to increase your competitive advantages, which will translate into a more valuable brand, together with more customers, profits, and sales. Conversely, not buying the equipment can erode your competitive advantage and harm your brand.

Greater purchasing power

Equipment financing gives you more purchasing power, which you can leverage to negotiate a lower price and a more favorable agreement.

Improved credit

Making on-time payments can have a positive effect on your business credit score.

Who qualifies for equipment financing

Many businesses can be eligible for equipment financing since they are fairly safe instruments. Bear in mind that you will need to have a reasonably good credit score of about 600+. Nonetheless, even though your credit score is lacking, you might still find yourself accepted. You might compensate for a poor credit score by paying higher interest rates.

When applying for equipment, the lender will generally:

  1. Request you to fill an application 
  2. Ask you to provide tax returns and bank statements to prove the stability of your business
  3. Ask for a background and credit check
  4. Provide a quote for the equipment you are looking to buy

Lastly, you will have to find a lender that will finance the type of purchase you are looking to make- not all lenders support purchases of any equipment. Typically, there are many advantages to using Equipment financing; however, there are also some disadvantages. Unlike many other kinds of financing, equipment loans are meant for a very particular purpose. Whereas that prevents these loans from being versatile, it also means that the right person-equipment loans can be beneficial. To help yourself make a better decision, take the time to conduct research, understand your most pressing business needs, and determine the kind of equipment your business needs. This way, you will have all the information you need to make your company’s best decision.

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