Whether it is commercial ovens, landscaping tools, or a dump truck, your business cannot run without the right equipment. Perhaps you have a startup and need to purchase new items, or maybe it is time to upgrade your existing equipment. It may be that your business is growing and you can take on more clients. Regardless of the reason why you need an equipment loan, there are several things that you should ask yourself before you start applying for one.
The first thing you need to ask is if you need really need the equipment and how much return you can expect to receive on your investment. The answer to this question has to be in a real dollar amount. Intangible benefits do not count when it comes to the purchase of a tangible asset.
One mistake that startups often make is thinking that they need a lot of equipment when in the end, all it does is sit around and collect dust. This is wasted money. It is important to understand the needs versus your wants for the business. Capital is hard to come by, and equipment financing is expensive.
It is fun to have equipment with all the latest bells and whistles, but this also means borrowing more money and paying more interest in the end. You must weigh the benefits of add-on features against the total cost over the life span of the equipment. It may be wise to get a base model to start out with and then upgrade later when you can afford it.
However, there may be instances in which better equipment will last longer and may be the smarter choice. An example of this is a piece of equipment that saves you time and effort. The best way to decide if a piece of equipment is the right one is to physically list what you need the item to do. Then, you can weigh out all of the options to find the best choice.
When it comes to equipment loans, there are two major equipment financing options: lease or purchase. There is no single answer to which of these choices is best. Answering the following questions will help you decide which is the right choice for you:
Knowing the answers to these questions will help you understand how leasing and loan payments figure into the service life of the equipment.
There are several benefits to leasing that may make it the better choice for you. They include:
Typically, equipment leasing involves lower monthly payments than taking out equipment loans. This may seem attractive at first, but lower payments are not the only thing to consider when it comes to decide whether to lease or purchase. Another thing to consider is that a lease typically does not require a down payment. This can be an advantage if you do not have the capital for other equipment financing options.
If you lease, then you will replace your equipment more often than if you own it. This is the perfect choice for equipment that has a short service life. It is also a good choice for those whose cash flow allows them to come up with the extra cash to buy new equipment every few years.
If you lease and the equipment breaks, you are not out the cost of repair or replacement. It is someone else’s responsibility. This can be a major advantage if you do not have the extra cash on hand to handle an emergency. In addition, it can mean less downtime than sending a piece of equipment for repair. This is important when it comes to business continuity planning.
If you are planning for the near future or you foresee needing financing for other larger items later, then leasing may make sense for your business. One thing to check is whether you will have to pay property or sales tax in your state. In some states, even if you lease, you will have to pay tax. In other states, tax-free equipment ownership is another reason to lease.
As you can see, there are certain circumstances where leasing might be your best option. However, purchasing equipment outright has its advantages, too. They include:
If you own a piece of equipment, you are able to keep it after you no longer have to make payments. This means that you can use it as collateral for getting additional equipment loans. You can also sell it in order to put money down on a new item.
Equipment loans allow you to make equal monthly payments throughout the course of the loan term. In some cases, equipment leases may give you the option to purchase equipment in the end, but you will have to pay a lump sum or take out a loan with a longer term period. You may not have the cash flow to do this.
If you purchase your equipment, you can take depreciation of the equipment off your taxes. However, you will have to weigh the costs and benefits of this option against the sales and property tax that you will pay initially.
The terms that you are offered, whether you lease or purchase, will depend on your personal and business credit. The better your credit, the lower interest rate and better payback terms you will receive.
In some cases, collateral can be used in place of a hefty down payment. You can use other business assets, and sometimes, the piece of equipment itself can serve as collateral for equipment financing. Equipment lease financing differs from traditional loan financing in that it often does not require collateral.
Equipment loans often require less documentation for financing than personal loans or mortgages. Better credit scores and large down payments can help lower interest rates and, ultimately, the final cost of the loan. On average, down payments for an equipment loan run approximately 5 percent of the total purchase price.
Typically, you must have a personal credit score above 650 and have been in business for more than three years in order to qualify for an equipment loan. Some lenders also require a certain revenue level to consider you for a loan.
If you have lower credit, there are still lenders who may provide you with financing. In many cases, however, they will require collateral, co-signers, and/or a bigger down payment. You can also expect to pay much higher interest rates than if you had a better credit score.
There are certain pieces of documentation you will be required to provide for the lender. These are:
Business owners have a number of options when it comes to lending solutions. The available resources include:
You always have the option of local banks and traditional financing solutions for your business. In some cases, local banks will give small businesses good deals in order to attract larger, more stable customers. This may be a good option if you have a relationship with a local bank.
One of the drawbacks of using a local bank is that it can take longer to get the equipment than other financing options. In some cases, you may not be able to wait 30 days to get your new equipment. This could mean business downtime and lost revenues. It pays to shop around for the best rates if you decide to use this option.
Dealer financing often has stricter criteria than local banks or other financing options. However, there are still some dealerships that will offer loans to those with less-than-perfect credit. It does not hurt to ask. The advantage to this is that if something goes wrong with your equipment, the dealer will usually be willing to replace it quickly and get you back in business.
Some companies specialize in providing equipment loans to businesses. Many of these companies can provide you with same-day funding up to $250,000. Some of these companies offer highly competitive rates, so it is best to compare them to banks and other options. However, to get such a large loan, you almost have to have perfect credit and a long track record for your business.
The Small Business Association (SBA) is often a great resource when you need a business loan of any size. The organization offers low rates and repayment terms that are easy on the cash flow. Like traditional banks, however, the downside is that it can take up to 30 days to obtain an SBA loan. If you use this option, though, you may get more than just a loan. The SBA often provides mentors, financial advice, courses, and resources on how to manage your business better, which is something that you will not get with other lenders.
Something else that the SBA offers that other lenders do not is microloan financing. The average loan term for an SBA loan is seven years for working capital and 25 years for mortgages. The SBA has a maximum loan amount of $2 million.
The bottom line is that there are many equipment financing options. Once you decide whether equipment loans or equipment leasing is the right choice, you then need to make sure that you qualify for the loan with the lender that you choose. If you know that you need to make a large equipment purchase in the future, it is best to start working on getting your capital together and getting your credit score up as high as possible. This will put you in the best position when it comes to choosing a lender.
Whether you choose to lease or purchase depends on your personal business circumstances. Both equipment lease financing and loans have advantages and disadvantages. Hopefully, you will have the advantage of time to shop around and compare your options. If you don’t, having your options in mind and knowing where you stand in terms of business success can make the process much easier. Equipment loans are a great way to start off or expand your existing business.
Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.