Why Use Equipment Financing?

Why Use Equipment Financing?

Equipment Financing Benefits You Should Know About

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, construction equipment or manufacturing equipment. As you can imagine, industrial equipment and machines can be costly, and startups and small business owners 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 financing comes in.

Reasons why your business should use equipment financing

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 for purchasing equipment for your business. You will be able to manage your cash flow seamlessly, as this loan will enable you to spread out your debt repayments over a long period. Here is an overview of some of the benefits of 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 helps you keep up-to-date with the best equipment

Another reason why you should use the equipment financing option 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 monthly payments to the lender or bank over the agreed-upon terms. With every lease payment, there is interest paid. With most equipment loan 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 or other small business loans 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 equipment.

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. Besides other financing options such as business credit cards, invoice factoring, invoice financing and merchant cash advances tremain open. With equipment financing the equipment itself serves as collateral to secure the loan, so any other collateral that a borrowing business can provide can be used to secure additional business finance 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 are two key factors of how long equipment financing processes take- the size of the equipment purchase and types of equipment . Applying for an equipment loan for equipment costing up to $200,000 is fast and easy, and the whole process- from application to closing- can often be completed within 24 hours, especially if you apply through online lenders. All you need is equipment quote, business plan, annual revenues, a good business and business credit score, balance sheet and income statement and business financial statements.

Equipment loan amounts 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 period of 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 be required 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 an equipment lease or loan can lock in the rates that exist on the date of closing. In simple words, the finance company absorbs your equipment leasing or financing 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. With a lease, you can return the equipment to the leasing company at the end of the lease term or purchase it at the current market value.

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.

Bonus Depreciation

Bonus Depreciation is a kind of write-off that has a significant advantage for companies over the prior tax law. It requires businesses to depreciate capital assets using the modified accelerated cost recovery system. Whether a  business acquires equipment via a loan or lease, Bonus Depreciation helps in making the transaction more affordable.

Equipment leasing and financing rate, qualification and terms

Equipment loan terms and rates depend on the lender, your business profile and type of financing you opt for. The table below summarizes the equipment loan terms and rates:

Credit score At least 600 and above
Collateral Purchased equipment with the loan (personal guarantees and a blanket UCC lien) 
There’s no need for other personal or business assets
Rates 6 percent to 30-percent
Term lengths Five to seven years depending on the economical life of the equipment

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 you have a bad credit score or you have no credit history, you might still find yourself qualifying for a loan. You can compensate for a bad personal credit score by paying higher interest rates. There are many types of equipment financing programs and online lenders can customize a solution to fit your business needs.

When applying for equipment finance/lease, lessors/lenders may require:

  • You to fill an application 
  • Ask you to provide tax returns and bank statements to prove the stability of your business
  • Ask for a background and credit check
  • Note your business should have the ability for credit card processing
  • Provide a quote for the equipment you are looking to buy

If you are a qualified borrower with an excellent credit score and the amount of time your business has been operating in more than two years, you can opt to finance equipment with small business administrations sba loans like sba 7a, paycheck protection program PPP loans and Covid19 resources , short-term loans or long term loans. These business funding options have better terms, lower monthly payments and interest rates.

Lastly, you will have to find a lender or a leasing company that will offer business funding to various types of equipment, including the ones that your business specializes in- not all lenders support purchases of any equipment. Typically, there are many benefits of equipment finance; however, there are also some disadvantages.  Unlike many other types of business loans, business equipment loans are meant for a very particular purpose. Whereas that prevents these loans from being versatile, it also means that with 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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