Upgrades are an inevitable truth for businesses in every industry, and sometimes they are the difference between success and failure.
Equipment loans are a lifeline for business owners in need of improvements but lacking the capital to spare. If you are thinking about getting an equipment loan and aren’t sure where to start, read over this brief article to learn the basics and benefits of this type of financing, when you might need it, and how you can get it.
What Is an Equipment Loan?
Equipment loans are exactly as they sound. You apply for a loan to purchase the necessary equipment for your business. The word equipment in this case has a very broad definition, varying greatly within specific businesses and industries. It can cover everything from table linens and cutlery for a restaurant to medical equipment for a doctor’s private practice. Anything that is essential to keep your business running falls under the umbrella of equipment.
New equipment loans can be used to purchase brand new equipment and are often needed when old equipment is damaged or outdated. You can also use the loan to repair broken equipment that is not yet obsolete. You also have the choice to lease rather than purchase.
The Difference Between Loans and Leases
Any equipment loan for your business will vary in terms and conditions by the lender, but you can generally expect to finance roughly 80 percent of the total cost of purchase, and you will provide a down payment of 20 percent. Anything you purchase will be immediately transferred into your ownership. As you might expect, the collateral for the loan is the equipment.
Equipment leasing is more beneficial for small businesses with no available capital because it usually requires little or no down payment. Generally, your leasing will include 100 percent financing plus around 20 percent of the costs for taxes and delivery fees. You also have the ability to return the item at the end of the lease or purchase it for a small amount. Leasing is particularly beneficial for businesses that need to frequently update equipment.
What Do You Need to Get an Equipment Loan?
Before you meet with lenders and apply for an equipment loan, you need to know the main components of the loan application. There are four key elements under consideration: credit score, personal resume, business plan, and cash flow. Consider these before your meeting.
- Is Your Credit in Good Standing? Any lender will want to evaluate your potential risk factors, and your credit history is the primary tell. Keeping your long-standing credit in good shape is vital. Be prepared to show your business and personal credit history.
- Do You Have an Updated Resume? A personal resume gives lenders a better understanding of the person behind the business. You will be responsible for the payment; therefore, a resume that reflects success and reliability is an asset.
- Can You Present a Strong Business Plan? Identify your business and your plan for the equipment you need to purchase. Thoroughly describe what you do, including what products or services you provide, and how you fulfill a need in the market. The length is not as important as the content, so keep it straight to the point.
- Can You Provide Cash Flow Statements? Lenders will need to see that you have money coming in and out in order to believe that your business is viable. Be prepared to show your cash flow statements; this is a must for consideration.
The more prepared you are, the faster the loan process will move. If you have everything a lender needs upfront, you also appear more responsible. How you present yourself is important.
When Might You Need an Equipment Loan?
Your equipment needs depend on your industry and will change as you grow and expand. However, there are some specific reasons that any business might consider equipment loans.
- You want to maintain working capital. Just because you have the ability to purchase equipment without loans does not mean that you should. You need to keep your account stocked to cover other business expenses, such as payroll and utilities.
- You want to avoid traditional loans. Standard business loans are document-heavy and require a lengthy review process. Because the equipment is the collateral in an equipment loan, you save money and time.
- You need to upgrade quickly to remain competitive. Growth and innovation are essential to competition. If you need more or better equipment to increase and improve productivity, you can achieve that with equipment loans for your business.
- You have passed the point of repairs. It is always good practice to compare the cost of repair to the cost of new equipment. Additionally, if you are constantly repairing a piece of equipment, it may benefit you financially to simply replace it.
- You already have the down payment. If you are trying to decide whether to lease or purchase, the down payment may be a major factor. If you know you want to own the equipment, either way, a loan is the better option.
These are just a few examples of reasons to get a loan. There are others. You can write the purchase off on your taxes, offsetting your tax burden. Also, sometimes leasing simply does not make sense. The most common reason is that you just need the equipment.
What Are the Benefits?
As previously discussed, equipment loans are approved or denied quickly. They are tax-deductible and keep working capital in your account and cash-on-hand to help you maintain business operations. As with leasing, equipment loans often cover approximately one-fourth of the cost of fees, delivery charges, and taxes.
The payment schedules vary by lender, but they are routinely flexible. Sometimes you can choose to make monthly, quarterly, or biannual payments. If your business relies on seasonal work, you may even make seasonal payments.
Financing is a complex process with selections to suit the varying needs of business owners. Take the time to understand your options. If you need help building your financial platform or want more information on equipment loans and leasing, let the experts at Platform Funding assist you.