Benefits of Business Equipment Financing
Business equipment financing and leasing opportunities present businesses with the financial tools needed to expand, move ahead of the competition, continue to innovate within the industry, and bet on their success – at the cost of specific risks.
Borrowing money can always get difficult or awkward between individuals, but it is practically a must for businesses. Certain businesses can’t get off the ground even with their initial funding without looking for other investors and potential financing options, whether a small business loan to shoulder the cost of new equipment or taking out a cash loan to cover payroll during hard times.
What Is Business Equipment Financing
However, business equipment financing options differ from the typical small business loan or bank-provided term loan. These are specific agreements between businesses and private lenders offering money to purchase a particular vendor’s inventory or pay to use said inventory through a lease.
Under most circumstances, a business equipment financing company will provide you with the funds needed to purchase specific equipment, as per the terms of the agreement, often with a particular vendor list or list of valid models.
These financing options are usually easier to acquire than an equal value cash loan because the business equipment financing providers can rest assured that their borrower is using the funds for a piece of equipment that will serve as valuable collateral to secure the loan. In the case of a lease, the equipment financing provider will often work with a list of vendors who offer leasing deals on a business-to-business basis.
Vendors are great for companies looking for ways to finance new equipment while maintaining their cash flow and preserving the option of a regular cash loan for other investments. Here’s what you need to know.
Understanding Your Cash Flow
The main argument against buying equipment outright – even when you can afford to – is cash flow. Yes, on a linear level, it is usually cheaper to buy commercial kitchen equipment or a floor’s worth of office equipment with company capital than seek out a lease or take out an equipment loan with a business equipment financing provider. However, there are many reasons why the straightforward reason might not be the best.
The first reason is that it is more convenient to lease equipment. Most equipment needs to be renewed or replaced every few years anyway. Why bother owning the equipment and then finding a broker to supervise a fair sale when you can lease it for however long you need it, then move on to a newer or better model.
Second, utilizing your current working capital may harm your cash flow. You may pay less in the short term, but you could be robbing yourself of the security that the extra cash could afford you. Alternatively, you could be spending that working capital in other ways that aren’t as easy to finance. Failing to preserve your cash flow may also cost your business by not accounting for unforeseen financial dangers, including a stagnating market or a bad season.
To reiterate – seeking financing for your equipment helps free up cash for your operating expenses and other investments.
The Race Against Inflation
A lease payment plan is a fixed cost, meaning you pay the same amount each month. But inflation means that money is worth less year after year. Fixed costs are also the same for monthly installments at the beginning of the loan term to avoid recalculating and adjusting for market changes.
Fixed costs can be harmful if the equipment you’re buying loses value after purchase, regardless of its natural depreciation – such as becoming obsolete due to entirely new technology. But unlikely circumstances aside, you may be looking at a net gain through leasing or an equipment loan versus outright purchasing new equipment.
The Value of Credit
Never underestimate the power of credit – especially for a growing business. The ability to build a rapport with a financing company helps you improve your credit score by taking on more outstanding loans and avoiding defaults. It also enables you to prove yourself as a trustworthy borrower. It may help your business earn a competitive edge when negotiating terms for equipment leases and loans.
The Tax Advantages of Business Equipment Financing
There are a lot of tax considerations behind making an expensive investment in business equipment. Buying equipment generally lets you write off the losses incurred by the depreciation of certain assets, including vehicles.
But business equipment leasing gets you a more tangible and immediate tax benefit – in most cases, you can write off each equipment leasing payment as a tax-deductible business expense.
Lower Minimum Qualifications
Term loans or unsecured cash loans may have higher requirements, such as being in business longer or having a better credit score than your current business. While there are still requirements for a business equipment loan or lease, these may be lower than you usually find.
Financing companies may also work with you if you present a sound business plan and financial proof of viability, including a strong and secure revenue stream and healthy cash flow.
Considering The Cons of Business Equipment Leasing
It’s not all perfect. Before jumping at an opportunity to seek financing, consider some of the following.
Tough Times for New Businesses
Equipment loans and leases are still loans and leases. Most businesses have minimum requirements before they can begin borrowing cash or leasing equipment. In most cases, a company must be at least a year or two old. Younger businesses may still seek financing but have more difficulty acquiring it. Learning how to finance equipment can be challenging for most new businesses. Minimum requirements keep a lot of startups from receiving good financing options.
Down payments are another one of the reasons a company might want to consider a lease over a loan. Most equipment loans require a down payment on the value of the equipment before you can tap into the finances of your lender. Your lender may require you to shoulder that down payment. Shouldering the cost can eat into your working capital, which may or may not be worth the investment. A lease usually requires a flat monthly payment (akin to a rental). However, some lease agreements include down costs, written with eventual ownership.
Finding the right financing partner can be tricky. While companies can pool cash and resources from SBA loans, bank term loans, and business lines of credit, equipment financiers will offer better terms for a loan or lease that centers strictly around used or new equipment. However, you will still need to prepare accordingly. That means preparing for a business loan:
- Your business credit score
- A few months’ worths of financial statements
- Business plan
- Business tax return
- Revenue history
- Your personal financial information and credit history (if you are a managing party within the company)
- And more
It’s essential to compare and contrast your options and narrow them down to the best ones. Take your time to go over the finances and negotiate better terms.