5 Reasons Business Equipment Financing Can Help You Grow
There are many loan options available when searching for business equipment financing, when you need that new piece of machinery or tool that will make your life easier. According to the Equipment Leasing and Finance Association, about 79% of US-based businesses used equipment financing before 2019. With the 2020 pandemic, that figure increased significantly. This article explains why equipment financing works for many small business owners and 5 reasons why you should have one.
1. The ability to manage your budget is easier
No down payment or collateral
An equipment loan is financing provided to you by a lender to acquire equipment required for the business to operate. With this loan, you can get the essential tools needed to increase profitability without hurting business cash flow.
Most customized financing options usually require some form of security. Traditional or online lenders would not ask you for a down payment. All that is needed is a personal guarantee and a decent credit score.
You usually do not need to provide personal assets as collateral to secure financing either. That’s because the equipment you purchase serves as collateral. If you default on your equipment loan the lender can sell the equipment to recover some money.
Preserve cash flow
Equipment financing takes the pressure off your cash reserves. Generally, online lenders, bank, or credit unions will provide an equipment loan equal to 80-100% of the equipment cost. You don’t have to risk your personal credit or business cash reserve to purchase heavy equipment outright. You can channel the business funds to serve as working capital. It also means that you have money reserved for emergencies.
Save on soft costs
Usually, when you buy equipment, you also have to come up with delivery fees, installation fees, and other soft costs. Some lenders offer equipment financing that covers these costs. The soft costs are usually calculated separately. They can raise the value of the equipment loan up to 125% of the equipment cost.
2. Tax deductions on financed equipment
Every business owner knows that taxes are not cheap so it’s smart to take advantage of every legal loophole that allows you to pay less. Equipment loans can qualify your business for tax savings thanks to depreciation deductions.
But first, you have to meet certain conditions stipulated by the IRS. Some of the qualification requirements include taking the equipment loans from credible lenders and not being related to said lenders. Also, you must provide evidence that you really used the money to purchase business equipment.
Lease rents are tax-deductible and contribute towards reducing overall taxable income. That’s because a lease is considered a monthly business expense instead of an asset on your balance sheet. The savings gotten from tax deductions can be useful for scaling up the business.
It’s important to point out that in calculating your tax deductions, the IRS doesn’t consider origination fees and other administrative charges separately. The equipment purchase value and interest rates are what matter to them. So extra costs are usually added to the value of the equipment.
3. Sometimes financing is better than buying
You can finance heavy equipment like specialty vehicles, construction equipment, etc with a purchasing loan or equipment lease. In many ways financing equipment gives you the flexibility that outright purchase can not.
With equipment financing, you can purchase the equipment at fair market value without bearing the cost all at once. After completing periodic payments, you assume ownership if you took a purchase loan. With an equipment lease, you can return the equipment, take ownership or renew the lease.
Test the equipment
Ever spent money on a product only to find out it doesn’t work for you? Then you’ll appreciate the equipment testing benefits that equipment financing offers. If you use equipment financing to get a piece of equipment, you have an extensive amount of time to decide if you got the right equipment. And you can do this without putting your personal or business finance at risk.
An equipment financing agreement allows you to make monthly payments towards the ownership of the equipment you are already using. Equipment finance payment options usually give allow you to pay back a fixed amount monthly.
You can conveniently spread the equipment cost over several months or years. Also knowing exactly how much you need to pay back makes managing your business cash-flow less chaotic. That way you can focus on effectively running your business.
Maintain debt-raising capacity
Taking equipment loans does not impact your borrowing ability as much other kinds of financing products do. It allows you to keep your options open. So should you need another type of business loan, you are not disqualified by a big debt on your balance sheet.
Given the uncertainty of the present economic clime, this is one advantage business owners could really use.
4. Upgrade to the top of the line equipment
Modern industrial technology advances every day and smart entrepreneurs know the latest tools provide a competitive advantage. If you are financing equipment leasing, you can easily upgrade to newer models. You don’t have to take out new loans for the acquisition of new equipment. Nor do you have to worry about selling the “old” equipment.
The leasing company just carts away the old equipment and replaces it with an updated version. Of course, that may change the terms of the lease. So a small business can piggyback on equipment leasing to ensure they always have the latest tools and machines.
Safeguard against inflation
Whichever equipment financing options you choose, you get the benefit of a price lockdown. That means that you do not have to worry about an increase in the purchase price or leasing fees.
It works this way, when you purchase, the lender will not increase your loan amount to match new equipment prices. It doesn’t matter much how many times the price of the machinery goes up during your repayment period.
Also, if you have signed a lease contract, the company can not increase your lease costs mid-contract. If inflation has occurred, they would have to wait until your lease expires to renew terms.
5. Better interest rates when you finance
Equipment financing works in such a way that the risk to both lender and borrower is greatly reduced. You can borrow as little as $5,000 or as high as $5,000,000 in equipment funding. The lender may require a business lien or personal guarantee for a huge loan amount.
Competitive financing rates
The equipment finance market is quite competitive and so lenders offer lower rates in hopes of being the more affordable option. The interest rate varies depending on equipment needs and market conditions.
The lender will also consider how long the equipment will retain prime value just in case of default. Equipment financing rates typically range from 4% to 30% APR. Some lenders might go higher.
The repayment period for equipment financing largely depends on equipment types and costs. Of course, the lender will have to consider the business size and years of operation. A new business may need a longer repayment term than an established small business.
Loans for equipment purchases can be termed for a few months, 5 years, 10 years, or more.
Credit score requirements
Because the equipment itself is security for equipment financing the lenders are more lenient with credit score requirements. The minimum credit score is usually 650 but some lenders may require 660.
Some lenders will consider lower credit scores of about 600. Some lenders like the SBA require a personal credit score of about 690.
The annual revenue required to qualify for equipment financing differs from lender to lender. Some online lenders will not ask for information on annual revenue and that’s great for a newly established small business.
Equipment financing gives your business a competitive advantage. It covers most business needs, from office furniture to milling machines. New and established businesses should explore equipment financing options when a need for equipment arises. Equipment financing pros far outweigh its cons and in many ways better than outright purchase.
Our team at Upwise Capital is here to assist you with every step of the way to secure whatever funding is needed to help your business grow. If you have any questions regarding how equipment financing works, please call our team at 77-55-UPWISE or email [email protected]. You can also apply online for equipment financing, so you can get back to work and running your business.
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