As a small business owner, you understand the importance of buying, maintaining, upgrading, and replacing the equipment needed to perform daily tasks. This is particularly true in industries such as manufacturing and transportation.
Unfortunately, buying equipment can put a strain on your finances, which can limit growth for your business. But there’s good news: Equipment financing allows you to buy what you need without putting your cashflow at risk.
Equipment financing is the process of obtaining funding to purchase or lease equipment for business use. This financing option allows your business to acquire the necessary equipment without having to pay the full cost upfront, making it a popular choice for companies that want to conserve cashflow.
However, there are finer details to equipment financing that should be considered before making a decision.
One important aspect to consider is the interest rate on the financing. Interest rates for equipment financing can vary depending on the lender, the type of equipment being financed, and the borrower's creditworthiness. It's essential to compare interest rates from different lenders to find the best deal.
Another crucial factor to consider is the length of the financing term. Longer financing terms usually mean lower monthly payments, but it also means paying more in interest over time. It's important to find a balance between the monthly payments and the total cost of financing.
Finally, you should be aware of any fees associated with equipment financing, such as application fees, origination fees, and prepayment penalties. These fees can add up and affect the total cost of financing.
Equipment leasing is a type of financing where you rent equipment from a lessor for a specified period of time. The lessor retains ownership of the equipment, and you make regular payments for the use of the equipment.
Equipment leasing can be a good option if you need to use the equipment for a short period of time or if you want to avoid the costs of purchasing equipment outright. It can also offer flexibility to upgrade equipment as needed and may have tax benefits.
The main difference between equipment financing and equipment leasing is that with equipment financing, the borrower owns the equipment at the end of the loan term. With equipment leasing, the lender retains ownership of the equipment.
Equipment financing terms and conditions vary from lender to lender. It’s important to compare several options to ensure you’re securing the best deal.
Furthermore, rates and terms vary based on your company’s qualifications and the current market conditions. For example, you may be able to secure a loan at 2% while another company is offered the same amount of funds at 8%.
Repayment terms typically range from 1 to 25 years. The longer the term, the lower your monthly payment. However, a longer term also means that you’ll pay more money in interest.
Every lender has different requirements for obtaining an equipment loan. So, even if one lender denies your application, another may approve it.
When making a credit decision, lenders consider various factors and have a set of general qualifications to guide them. Let’s take a closer look.
To start, both your business and personal credit scores play a big role in obtaining an equipment loan. You can check both of your scores for free online. In short, the higher your score the greater your chance of approval. High scores also allow you to secure favourable terms.
Many lenders also require a business plan. This gives them a clear idea of your business operations, planned use for the funds, and a proposal for future growth. Include details such as how long you have been in business and your annual revenue.
Finally, it’s possible that your lender may request documents such as a cashflow statement, balance sheet, and profit and loss statement. All of these documents help your lender assess the overall financial strength of your business and whether you qualify for a loan.
Understanding both the pros and cons of equipment financing can help you make an informed and confident decision. Use the following information to determine if now’s the time to proceed.
• Conserves cashflow: Equipment financing allows businesses to acquire the equipment they need without paying the full cost upfront.
• Tax benefits: Equipment financing may offer tax benefits, such as depreciation and interest deductions, which can reduce a business's tax liability.
• Fixed monthly payments: Equipment financing typically comes with fixed monthly payments, making it easier to budget and plan for expenses.
• Up-to-date equipment: By financing equipment, you can keep up with the latest technology and equipment advancements, which can help your business remain competitive.
• Flexible terms: Equipment financing can offer flexible terms, such as repayment periods and interest rates.
• Cost: Financing equipment comes with interest and fees, which can add to the overall cost of the equipment.
• Collateral: Equipment financing may require collateral, such as the equipment being financed, which can be a risk.
• Approval process: The approval process for equipment financing can be lengthy and require extensive documentation. This can be stressful and time-consuming.
• Ownership: Equipment financing may not provide full ownership of the equipment until the loan is paid off, which can limit a business's flexibility in selling or upgrading the equipment.
• Obsolescence: Financing equipment can become a burden if the equipment becomes obsolete before the loan is paid off, leaving businesses with outdated equipment and continuing debt.
While there are many benefits of equipment financing—along with a few potential drawbacks—it’s not your only option in your search for increased cashflow.
REV Capital can help by factoring your accounts receivable. With this, there’s no reason to secure a loan or lease equipment. Instead, you can quickly gain access to funds through factoring, thus allowing you to take advantage of lower interest rates.
Apply now online to learn more about REV Capital, invoice factoring, and how to start the process.