Equipment Financing For Small Business: What It Is, How It Works, And More
Equipment and tools are integral for any business to keep its operations running smoothly. And notably, the pieces of equipment can be very expensive at times. Mostly, for trades that need specialized tools and performance equipment.
On top of that, there is a constant need for investment in repairs and maintenance of equipment. And not to mention, at times, businesses also need to invest in equipment upgrades.
Cumulative costs of repair, upgrade, and replacement can bring a staggering stop to the cash flow for any business. So, the solution? Well, small business owners, in particular, can seek equipment financing options.
What is Equipment Financing?
As the name suggests, these are personalized loans specifically designed for purchasing business equipment. Typically, the lender keeps the equipment itself as collateral for the term of the loan. However, in some cases, the lenders may ask for an additional blanket lien or personal guarantee.
In a blanket lien, you may be asked to keep your business assets as a guarantee. The lender may assume possession, in case you default the payments. Whereas, with a personal guarantee, the lender may assume possession of your personal assets.
How does Equipment Financing work?
Like other loans, equipment financing also has a term for repayment of the debt. And the lender would also levy interests on the principle that you borrow.
However, for equipment financing, what's different is the term of the loan and the interest to be levied. Usually, these loans are short-term and come with an APR of around 15-25%. For this reason, they are also often referred to as the best small business loans for purchasing new equipment. But, then again, both these features depend on the amount you wish to borrow, your credit score and history, and several other factors.
Notably, there's an alternative to equipment financing, usually known as equipment leasing. For many business owners, leasing may seem like a better prospect, but surely not for most. The reason being, there is uncertainty about the ownership of the equipment after the lease term ends.
To put this into perspective, equipment leasing refers to renting piece(s) of equipment.
As with any other leasing contract, you would be paying rent for the piece of equipment regularly, for an agreed period of time. And at the end of the term, you may choose to renew the contract or buyout the equipment. On the contrary, seeking equipment financing would mean that the payments you make would be deducted from its purchase value. Thus, at the end of the term, you can assume ownership of the equipment.
What to Consider?
As already mentioned, the availability of equipment financing depends on several factors. Careful consideration of your situation and assessing your needs can, however, help make a better decision.
The first and the foremost thing to consider when seeking finance for buying equipment is your budget. You need to know how much you can spend out of your own pocket. And likewise, how much would you like to borrow from a lender. Once you're sorted with your requirements, you can move further to explore the pieces of equipment that you need and who can finance the purchase.
It needs no mention that every piece of equipment would become obsolete after some time. Thanks to the advancements in the field of technology. However, if the equipment that you're planning to buy becomes obsolete too soon, then all your investments would be in vain. Generally, this happens when a manufacturer rolls out a new technology that replaces the old one.
Most important of all the decisive factors is the availability of credit. Usually, the banks and financing institutes would consider your credit score, history, your business model, outstanding debts, etc to determine your creditworthiness. Once this is done, and if you meet the criteria limit of the lender, they would make you an offer.
The least of all, but not the least important one, is exploring if you can reap any tax benefits from your loan. In most cases, business loans are usually exempted from tax. However, for certain cases, such as a business credit card or a merchant cash advances, you may need to pay taxes. Thus, it is better to have a clear idea about the tax benefits from your equipment loan.
Equipment financing can help you keep your cash flow steady, while also allowing you to scale up your business. Not only that, there are plenty of other reasons for which you can seek equipment financing. But, all the reasons must involve business equipment. On this note, we let you decide whether you should seek an equipment loan or not.